[Viewpoint] COVID-19 Crisis and Economic Outlook

Hyunhoon Lee, Professor, Department of International Trade, Kangwon National University

The International Monetary Fund (IMF) projected in its World Economic Outlook released on June 24 (local time) that the global economy will contract by -4.9% this year, while South Korea’s economy will shrink by -2.1%. These figures are lower than the economic forecasts announced in April (global -3.0%, South Korea -1.2%). The IMF cited the worse-than-expected global economic performance in the first half of the year and a delayed recovery in the second half as the basis for this revised forecast. Like the April forecast, the IMF’s latest revision is based on the fundamental assumption that the COVID-19 crisis will stabilize in the latter half of the year.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) projected on June 10 that the world economy will contract by -6.0%, and South Korea’s economy will shrink by -1.2%. The Bank of Korea and the Korea Development Institute (KDI) forecast that South Korea’s economy will grow by -0.2% and +0.2%, respectively, this year. These domestic and international institutions’ forecasts also assume that the COVID-19 situation will stabilize in the second half of the year.

However, the number of confirmed COVID-19 cases worldwide has finally surpassed 10 million and is increasing at an even faster pace. The virus is spreading rapidly, especially in developing countries such as Brazil, Mexico, India, Pakistan, and Bangladesh. The United States, which has the highest number of confirmed cases globally, saw daily new cases drop to 20,000 but then rapidly surged back to around 40,000 as lockdown measures and social distancing were relaxed. South Korea is also experiencing a rise in confirmed cases again, mainly in the Seoul metropolitan area.

Based on current trends, the assumption that COVID-19 will gradually subside worldwide appears to be incorrect. Moreover, the forecast that the virus will wane during the summer and then resurge in the latter half of the year also seems unlikely. Although there may be differences by country, the global trend is a continuous spread, with a high possibility that the second wave during the Northern Hemisphere’s winter will be more severe than the first. Furthermore, vaccine development is still at an early stage comparable to kindergarten level, and experts agree that it will likely be available only by the first half of next year at the earliest. Even then, it is uncertain whether vaccination will be accessible to the general public before the latter half of next year.

Ultimately, the global and South Korean economies are very likely to fall into a much more severe downturn than the forecasts of various domestic and international institutions. In fact, economic forecasts often miss the mark to the extent that they are considered almost a matter of fate. For example, in April 2008, when the subprime mortgage crisis in the U.S. was causing severe credit tightening in global financial markets, the IMF predicted global economic growth of 3.7% in 2008 and 3.8% in 2009. However, the actual global growth rate was much lower at 1.9% in 2008 and -1.7% in 2009.

Another example is when the IMF announced its bailout plan for South Korea in December 1997, forecasting South Korea’s economic growth in 1998 at 3.0%. Then, in February 1998, it revised the forecast down to 1.0%, and in May, it further adjusted it to -1.0%. However, South Korea’s actual economic growth rate in 1998 was much lower at -5.1% than the IMF’s forecast.

If a second wave of COVID-19 occurs in the second half of this year, the global economy could contract sharply by more than -10%. Moreover, if the situation does not improve by the first half of next year, the global economy could continue to shrink by more than -5% next year as well. This is a simple calculation, but if the COVID-19 crisis prolongs, not only marginal companies but also large corporations and financial institutions will face a higher risk of bankruptcy. Additionally, fiscal and monetary policies that countries can deploy will reach their limits, making a more severe economic recession inevitable. To make matters worse, if a stronger variant emerges during the second wave than in the first, the situation will become even more serious.

During the Great Depression that began in late 1929, the world GDP declined by about -15% over three years until 1932. Due to the COVID-19 crisis, the world GDP is likely to decline by a larger margin than -15% in just two years by 2021. This suggests the possibility of a Greater Depression, even more severe than the Great Depression of the early 1930s. South Korea, which is highly dependent on foreign trade, cannot avoid the ‘global Great Depression’ alone. We should not rely solely on the economic forecasts of domestic and international institutions but fasten our seat belts firmly.