[Weekly Review] Impact of 'COVID-19' Visible Everywhere... Direct Hit to Consumption

Due to the impact of the novel coronavirus infection (COVID-19), the number of countries imposing entry restrictions on Koreans has exceeded 100. On the 13th, the departure hall at Terminal 1 of Incheon International Airport showed a quiet scene. / Yeongjongdo = Photo by Kim Hyun-min kimhyun81@

[Sejong=Asia Economy Reporter Joo Sang-don] The impact of the novel coronavirus infection (COVID-19) is becoming visible, especially in the consumption sector. Last month, the decline in passenger car sales reached levels comparable to the global financial crisis, and the number of Chinese tourists decreased even more than during the Terminal High Altitude Area Defense (THAAD) incident. As a result, the government's economic assessment has lost positive terms such as 'improvement' and 'recovery.'

◆ Greenbook: 'Economic Contraction and Increased Financial Uncertainty' = On the 13th, the Ministry of Economy and Finance diagnosed in the March issue of 'Recent Economic Trends (Greenbook)' that "due to the spread of COVID-19, our economic activities and economic sentiment are contracting, and uncertainties in the real economy and financial markets are expanding."

Domestic consumption took a direct hit. In February, domestic passenger car sales plummeted by 24.6% compared to the same month last year. This decline matches that of January 2009 (-24.6%), following the global financial crisis. Additionally, sales at department stores and discount stores fell by 30.6% and 19.6%, respectively. Notably, the number of Chinese tourists dropped by 76.1% compared to the same month. This decrease is even larger than the 69.3% decline in July 2017 during the THAAD incident.

Economic sentiment also contracted significantly. The Consumer Sentiment Index (CSI) in February was 96.9, down 7.3 points from the previous month. The Manufacturing Business Survey Index (BSI) for February performance was 65, down 11 points from the previous month, and the March outlook was 69, down 8 points from the previous month.

Consequently, the government removed the phrase 'economic improvement trend' from the Greenbook. Previously, the Ministry of Economy and Finance had excluded the term 'sluggish' for four consecutive months after omitting it for seven months from April to October last year, and had changed the diagnosis of 'adjustment phase'?which was only mentioned for exports and construction investment?to an overall level of 'improvement' and 'recovery.' Kim Young-hoon, head of economic analysis at the Ministry of Economy and Finance, said, "The economic impact of COVID-19 on our economy has become inevitable, and uncertainty in the production path has increased. In this situation, it is burdensome to maintain the expression of an improvement trend." However, he added, "To judge that the 'gradual improvement trend has completely broken' requires observing future indicators a bit more. It is difficult to make this judgment based solely on consumption indicators."

◆ South Korea's Consumer Sentiment Decline Largest in OECD = According to the Organisation for Economic Co-operation and Development (OECD), South Korea's Consumer Confidence Index (CCI) last month fell by 0.4 points from 100.0 the previous month to 99.6. This was the largest decline among the 25 OECD countries for which data collection was completed.

The country with the second-largest drop in CCI after South Korea was Turkey (95.2 → 94.9). Japan, where confirmed cases continued to increase on cruise ships, saw only a 0.1-point decrease (99.0 → 98.9). South Korea's consumer sentiment cooled quickly due to its proximity to China and the emergence of confirmed COVID-19 cases from the end of January.

◆ Impact of COVID-19 Leads to Decline in Average Daily Exports in March = According to the Korea Customs Service, export value (provisional clearance basis) from March 1 to 10 was $13.339 billion, an increase of 21.9% ($2.4 billion) compared to the same period last year. This was mainly due to an increase in working days (7.5 days), which was 1.5 days more than last year.

However, when adjusted for working days, the average daily export value was $1.78 billion, a 2.5% ($40 million) decrease compared to $1.82 billion during the same period last year. If the impact of COVID-19 prolongs, the entire March export is inevitably expected to be hit due to weak demand caused by the global economic slowdown.

◆ National Finances in the Red... First Deficit in Managed Fiscal Balance = According to the 'March Fiscal Trend' announced by the Ministry of Economy and Finance, the managed fiscal balance recorded a deficit of 1.7 trillion won as of the end of January. This is the first time since monthly aggregation began in January 2011.

The managed fiscal balance is the integrated fiscal balance, which is total revenue minus total expenditure, excluding social security fund balances, and is an indicator that reflects the government's actual fiscal soundness.

As of the end of January, total revenue was 51.2 trillion won, down 100 billion won compared to the same month last year. National tax revenue totaled 36.5 trillion won, including 9.3 trillion won from income tax and 18.5 trillion won from value-added tax, which was 600 billion won less than the same month last year. This includes the decrease in value-added tax (about 1.5 trillion won) due to the increase in local consumption tax rate (from 15% to 21%).

In particular, both corporate tax (1.6 trillion won as of January) and customs duties (700 billion won) decreased by 200 billion won each. The decrease in customs duties is due to a 3.1% drop in import performance from $89.2 billion (approximately 106.7992 trillion won) between December 2018 and January 2019 to $86.4 billion between December 2019 and January 2020.