The Korea Herald


Economic contraction accelerates as COVID-19 battle continues

Global economy expected to log minus 2.6% growth while S. Korea suffers sharpest drop in service sector

By Bae Hyunjung

Published : May 12, 2020 - 17:20

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Chung Chul (center), senior vice president of the government-funded Korea Institute for International Economic Policy, speaks in a press briefing held Tuesday at Sejong Government Complex. (Bae Hyun-jung/The Korea Herald) Chung Chul (center), senior vice president of the government-funded Korea Institute for International Economic Policy, speaks in a press briefing held Tuesday at Sejong Government Complex. (Bae Hyun-jung/The Korea Herald)

Despite hopes building on a return to normal life around the world, the speed of economic contraction globally and in South Korea has been accelerating due to the pandemic over decreased spending, investment and production, casting a dark cloud over all-out efforts to contain the damages, figures by think tanks and central bank showed Tuesday.

Korea’s economic contraction has been gaining momentum in recent months due to lackluster consumer spending and exports following risks stemming from the COVID-19 pandemic, according to state-run think tank Korea Development Institute.

Asia’s fourth-largest economy’s overall industrial output declined 0.3 percent on-month in March, while the service sector output declined nearly 5 percent in the same period, marking the sharpest drop since the KDI started compiling the data in 2000.

The economic contraction has also translated into a contraction of the job market, with the overall number of the employed having declined by 195,000 on-year in March.

In April, exports sank 24.3 percent on-year to $36.9 billion and the export-reliant economy suffered a trade deficit of $950 million. This ended a 98-month streak of exports outrunning imports. April’s exports were weighed down by “the emerging contraction in external demand,” according to the KDI.

Korea’s exports dropped 46.3 percent on-year in the first 10 days of this month, it added.

The economic contraction also affected the size of bank loans extended to corporates, with the figure seeing the sharpest on-month increase in April since the Bank of Korea started compiling such data in June 2009.

According to separate data released by the central bank, fresh bank loans to local businesses jumped by 27.9 trillion won ($23 billion) on-month to 929.2 trillion won in April. This eclipses the previous record-high on-month growth of 18.7 trillion won last month.

Large business groups borrowed 11.2 trillion won from banks, which is a slight increase from 10.7 trillion in March, while small and medium-sized firms and the self-employed borrowed 16.6 trillion won, in the cited period.

Meanwhile, fresh bank loans extended to local households came to 4.9 trillion won in April, marking a sharp decline from a 9.6 trillion-won gain in March -- the largest-ever monthly increase since 2004.

The drop was partly attributed to the COVID-19 outbreak that forced people to stay home, leading to a cut in their spending.

Home-backed loans, including mortgages, added 4.9 trillion won last month, falling slightly from a 6.3 trillion-won gain in March.

Complexity of risks

The COVID-19 pandemic involves a higher level of volatility globally than any previous economic crisis as it is simultaneously dampening all sectors of the real economy, ranging from investment, industrial production, private consumption and employment, according to the Korea Institute for International Economic Policy.

“The world economy in 2020 is expected to log an on-year growth of minus 2.6 percent, down 5.8 percentage point from 2019,” said Chung Chul, senior vice president and acting president of the government-funded think tank in a press briefing Tuesday at Sejong Government Complex.

KIEP’s latest outlook was based on the assumption that COVID-19 will gradually cool down by the third quarter at the latest and that the oil market will see the benchmark West Texas Intermediate price average at around $26.7 per barrel.

Focusing on the short- and mid-term impact of the epidemic, KIEP underlined the unique complexity of the risks posed by the new coronavirus.

“Not only is the pandemic a major risk per se, but it is also triggering additional risks such as burden on health care systems, tightened macro policy space, escalating nationalism and trade protectionism based on respective geopolitical interests,” said Chung.

“Risks refer to factors that upset conventional economic outlooks, and the ongoing pandemic has fundamentally and widely changed the mechanism of economic operations.”

Despite its prudent approach to risks, however, the Korean think tank displayed more optimism than the International Monetary Fund which suggested last week that the global economy will likely contract 3 percent this year.

“The (0.4 percentage point) gap mostly came from different views concerning China’s growth capacity for this year,” Chung explained, answering a related question.

KIEP predicted that China’s economy will expand 2.2 percent this year on the back of its macro policy space and government investments, marking a contrast with the 1.2 percent suggested by the IMF.

“Though China struggled with COVID-19 in the early stages, its unemployment indexes are moderate, especially compared to the United States where the jobless rate is nearing 15 percent and may possibly exceed the 30 percent mark at some point,” said Lee Seung-shin, director general of Chinese economy.

Also, the manufacturing-centered structure of the world’s second-largest economy will serve as a forte as the epidemic and the consequent quarantines hit the hardest upon aviation, travel and other service sectors, she added.

“Considering the constant demand for consumer goods and electronic equipment, along with the government’s upcoming investments in 5G networks and artificial intelligence technology, we are generally sanguine over China’s growth potential.”

Excluding China, KIEP’s view mostly came in line with other global organizations including the IMF.

“Advanced economies have been attempting simulative actions through drastic fiscal and monetary policies, but are also putting their fiscal soundness at risk,” said An Sung-bae, director general of international macroeconomics and finance.

Emerging economies, especially those heavily reliant on services and natural resource exports, will grow more susceptible to the epidemic development, he added.

Addressing the diverse views concerning the economic growth curve throughout this year, KIEP pointed out that a high level of volatility is inevitable, given the nature of the current economic situation.

“As the incumbent economic crisis was caused by a contagious disease, there can never be a complete recovery unless a valid vaccine is developed and distributed,” said Chung.

By Bae Hyun-jung ( and Jung Min-kyung (