'Korean economy to show quickest recovery in 2021'

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Better virus containment, strong demand for IT goods to bolster growth

Jeremy Zook, Asia Sovereign Ratings Director at Fitch Ratings

By Lee Kyung-min

The Korean economy is expected to recover much faster than those of many advanced countries in 2021, due to its fast response to the COVID-19 pandemic and the solid demand for information technology goods as businesses increasingly go contactless, according to global economists.

They point out that the coronavirus will pose a serious threat to Korea's export-reliant economy, but it will rebound to its pre-pandemic level faster compared to global peers reeling from the fallout from poor disease containment measures.

These are views shared among global economic experts The Korea Times interviewed to see how the economic landscape is expected to unfold in the coming year.

On the bright side, the adoption of disruptive technologies, in their view, may mitigate the longstanding downside risk of rapid population aging amid a low birthrate, an inevitable trend many advanced economies are grappling with and becoming more accepting of due to declining productivity.

On the global stage, they expect subdued concern over the virus, following the development and mass distribution of vaccines, will put the drawn-out U.S.-China feud back into focus, setting the stage for an escalating global power struggle over hegemony that could o develop into an information technology war in the coming years.

Pandemic-triggered socio-economic inequality, they believe, will be a key issue for governments around the world, with intensified calls for greater involvement from the state to bridge the ever-widening gap between the haves and the have-nots.

Resilient Korean economy

Sohn Sung-won, a professor of economics at Loyola Marymount University.

"The Korean economy will show the quickest return to the pre-pandemic peak among OECD countries," Sohn Sung-won, a professor of economics at Loyola Marymount University, said.

The virus-induced crisis has been, according to the senior economist at the White House during the Nixon administration, relatively well managed without too much disruption to the economy compared to other countries. This is why he maintains a rosy outlook for Korea, a view further advanced by the expected rise in demand for Korean-made semiconductors, electronic goods and healthcare products as the global economy slowly recovers from the pandemic.

"After contracting about 1 percent in 2020, the Korean economy should grow by 3 percent or more in 2021," he said.

The positive outlook is echoed by Vice President and Senior Credit Officer with Moody's Sovereign Risk Group Christian de Guzman.

"We see Korea returning to its 2019 levels of real GDP before all other G20 advanced economies, a group that includes the U.S., euro area, Japan, Canada and Australia," he said.

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The reasons for the projection of a stronger performance by Korea include greater success at containing the coronavirus infection ― notwithstanding recent localized outbreaks ― as well as the composition of its export basket, which comprises many goods for which demand has been sustained through the pandemic, such as electronics.

Moody's projects Korea's real GDP to rise 3.1% in 2021. The Ministry of Economy and Finance expects the figure to be 3.2 percent, whereas the BOK said 3 percent.

Pandemic and debt

Antonio Fatas, an economics professor at INSEAD.

Korea is in the midst of a third wave of virus infections, and a failure to effectively control this will delay economic recovery, which in turn will prompt the need for a couple of more rounds of economic stimuli in 2021.

Without the stimulus package, chances are that economic growth will suffer a blow in the process since the vaccines will not reach the general population for a while, with the country's economy hanging in the balance.

The issue continues to put Korea's monetary and fiscal authorities in a bind over snowballing debt, a cause for major concern cited by many local economists mostly due to the rapid pace of the increase.

Yet the collective voices are rather overblown, given Korea has been able to report a current account surplus.

"This is not the time to worry about debt ― both corporate and public ― less so in Korea, a country that has been a saver for many years," Antonio Fatas, an economics professor at INSEAD, said.

"The risk of a slowdown in the recovery remains substantial. Therefore, we should continue with aggressive monetary and fiscal policies. That's the best way to avoid a financial crisis."

The risks from rising government debt alongside the property market overheating and population aging were already apparent even before the pandemic, and the combination of all three will pose a limited risk to the economy as a whole, according to Moody's senior analyst.

"While the government's macroprudential measures have only shown limited effectiveness in controlling price appreciation, the associated risks to financial instability are mitigated by the banking system's relatively strong fundamentals," he said.

This is echoed by Jeremy Zook, Asia Sovereign Ratings Director at Fitch Ratings. "The relatively modest economic contraction has helped to limit the deterioration in public finances compared to rating peers. With the four supplementary budgets to support the economy, we estimate Korea's fiscal deficit in 2020 reached 4.4 percent of GDP including social security, compared to the 8.4 percent of GDP AA median deficit. Korea's estimated debt ratio at end-2020 of 43.9 percent of GDP is in line with the AA median."

Similarly, the property market bubble, according to Sohn, is a byproduct of an expansionary monetary policy and supply shortages, not a result of the record-low borrowing rate.

"The property market bubble does not mean that the Bank of Korea was wrong in lowering the interest rate. The overall macro economy of Korea benefitted from the monetary policy. As economic growth slows, the demand for housing will cool. Government initiatives to increase supplies should help," he added.

Resumption of US-China feud

Christian de Guzman, Vice President and Senior Credit Officer with Moody's Sovereign Risk Group.

A resumption in trade tensions that have been paused over the past year could undermine the global recovery, with the Korean economy caught in the crossfire yet again.

"The continuing trade and political friction between the U.S. and China will have knock-on effects on the Korean economy," Sohn said.

The U.S.-China relationship in his view will be in focus again after the pandemic comes to an end, highlighted by a different approach to be adopted by the incoming Biden administration with more emphasis on multilateralism as opposed to Trump's unilateralism.

"As the Korean saying goes 'When whales fight, shrimp get hurt,' Korea will suffer due to conditions over which it has no control," he added.

The notable change in trade direction should be taken with equal weight on the positive and negative effects for Korea, since the complicated, complex and multi-layered issue could fast become politicized, increasing unwanted, unforeseen exposure for Korea.

"The return of the U.S. to multilateralism bodes well for a more cooperative approach towards trade, but it may still be too early to discern how the new U.S. administration balances economic objectives with its broader strategic and security goals," Guzman said.