COVID-19 requires bold economic measures

By Troy Stangarone

The situation that the world faces today is grave. Borders are being shut and economies are coming to a standstill. French President Emanuel Macron put it simply, "We are at war."

While the crisis being fought today is not a war in the sense of troops in battle, lives are at stake and the tactics used to preserve them will have significant economic consequences.

The first priority must remain dealing with the public health emergency from the coronavirus. Despite steps to shut borders and isolate countries, the coronavirus can most efficiently be tackled through cooperation.

Here South Korea can help the international community. Its rapid expansion of testing, transparency, and use of technology have helped to flatten the curve of COVID-19's spread.

But an important secondary consideration is how nations handle the economic consequences of containing the spread of the coronavirus.

As the world's major economies resort to social isolation policies to stop the spread of COVID-19, economic activity is increasingly becoming constrained.

Four former chief economists at the International Monetary Fund believe that the global economy has already entered a recession, meaning global growth is expected to slow to less than 2.5 percent.

Others, such as Bloomberg Intelligence think the damage could be deeper. It previously suggested that a global pandemic from COVID-19 could slow global growth to 0.1 percent.

On a national level, Oxford Economics estimates that the U.S. economy could contract by 12 percent in the second quarter of this year, while Capital Economics estimates that China's economy may have contracted by 20 percent in the first quarter. Much of Europe remains under quarantine and will face similar economic challenges.

For South Korea there has been a supply shock from the closure of key supply chains in China and increasingly a demand shock as South Korea's trading partners head for recession or enact travel restrictions.

For some sectors the shock has been manageable to date. Through the first 10 days of March, South Korea's average daily exports were only down 2.5 percent after a decline of only 1.5 percent through the first two months.

We should expect those numbers to deteriorate in the days ahead. In early March, the United States had yet to begin any social isolation policies and Italy's national quarantine had only been in place for a couple of days. Trade data is likely one area where the ultimate effects on the economy are lagging.

Some areas, such as the airline industry, have seen immediate declines. With more than 150 countries placing travel restrictions or warnings on South Korea, travel has come to a grinding halt. Korean Air has reduced capacity by 80 percent. Asiana Airlines has cut its capacity by 70 percent and budget airlines have been largely grounded.

Estimates only a couple of weeks ago from the International Air Transport Association suggested that minimal spread of COVID-19 around the world cost South Korea's airline industry $2.8 billion. Now there are increasing suggestions that airlines worldwide may be bankrupt by the end of May.

The decline in international travel also means losses for the tourism industry. Based on those prior modest travel declines South Korea's tourism industry would have seen losses of $2.4 billion. These will likely be significantly higher now.

As a result of the domestic spread of COVID-19 and the decline in international visitors, the restaurant industry has seen nearly a 60 percent decline in customers.

All of these industries face direct economic challenges and little prospect in the near future of seeing customers return.

Managing these and other economic consequences of the coronavirus in the months ahead will require South Korea to ensure that companies maintain access to liquidity. But in time, without customers, even cheap access to capital will not keep businesses afloat. If workers are laid off or placed on unpaid leave, domestic demand will weaken even further.

President Moon Jae-in has formed the Emergency Economic Council to manage the economic situation and provide assistance to small- and medium-sized enterprises. During the council meeting last week, the government came up with an economic rescue package worth 50 trillion won ($40 billion) to help small- and medium-sized enterprises (SMEs) and the self-employed which have suffered the most from the impact of the coronavirus.

On Tuesday, President Moon doubled the amount to 100 trillion won to provide more assistance not only to SMEs but also big businesses. And 48 trillion won of the money will be used to stabilize the financial markets. This rescue package forms important first steps.

Financial assistance should be provided swiftly to hard-hit firms. Those businesses outside of the airline and hotel industry most vulnerable to the crisis are small shops that have the least ability to weather the crisis. But a more direct fiscal stimulus, perhaps coupled with a requirement that the airline industry and others retain their workers will be necessary.

It may still be too early to know what the final damage from the coronavirus will be, but there is the real risk of a severe recession. To minimize that risk as much as possible it is better to be bold than to act too slowly.

Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.