[Weekly Review] Corona Shock... Q2 Growth Rate -3.3%, Worst Since the Foreign Exchange Crisis

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is delivering opening remarks at the "11th Emergency Economic Central Countermeasures Headquarters Meeting and 1st Korean New Deal Related Ministers Meeting" held on the 23rd at the Government Seoul Office in Jongno-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Kim Bo-kyung] The global pandemic of the novel coronavirus infection (COVID-19) continues to impact our economy. The economic growth rate in the second quarter of this year fell by the largest margin since the 1998 foreign exchange crisis, and exports in the second quarter plummeted by nearly 17% compared to the previous quarter. From the 1st to the 20th of this month, exports decreased by 12.8% and imports by 13.7% compared to the same period last year. The government announced the '2020 Tax Law Amendment' which encourages tax increases on the wealthy, including raising the top income tax rate, to overcome the crisis.

◆ Second Quarter Growth Rate, Worst Since the Foreign Exchange Crisis = The Bank of Korea announced on the 23rd that the preliminary real Gross Domestic Product (GDP) for the second quarter was 447.4 trillion won, down 3.3% from the previous quarter. This is the lowest level since the first quarter of 1998 (-6.8%) during the International Monetary Fund (IMF) foreign exchange crisis. Comparing to the financial crisis in the fourth quarter of 2008, which recorded -3.28% when rounded to the second decimal place, this year's second quarter growth rate of -3.33% was even worse. The problem was exports, which recovered more slowly than expected. Exports, which recorded -1.4% in the first quarter, fell further to -16.6% in the second quarter. The export performance worsened due to domestic demand slumps and reduced demand in major countries such as the United States and Europe amid the COVID-19 pandemic. Construction and facility investment also turned negative. Construction investment, which was 0.5% in the first quarter, turned negative to -1.3% in the second quarter, and facility investment dropped from 0.2% to -2.9%.

◆ Tax Law Amendment Including Wealth Tax Increase... "Overcoming COVID-19" = On the 22nd, the government announced a tax law amendment focusing on raising income tax for ultra-high earners. A new tax bracket for taxable income exceeding 1 billion won was created. Currently, a 42% tax rate is applied to taxable income exceeding 500 million won, but going forward, a 42% rate will apply to the 500 million to 1 billion won bracket, and a 45% rate will apply to income exceeding 1 billion won. This means the tax rate increases by 3 percentage points for taxable income over 1 billion won. The government plans to introduce the concept of financial investment income, including listed stocks and stock-type funds, from 2023, applying a capital gains tax rate of 20% (25% for amounts exceeding 300 million won). The basic deduction threshold for taxation is set at 50 million won. The comprehensive real estate tax and capital gains tax reform plans previously announced through real estate measures are included in this tax law amendment. The government explained that the foundation of the 2020 tax law amendment is to overcome COVID-19 and revitalize the economy. There is also analysis that the increase in the top income tax rate, strengthening of housing ownership and transaction taxes, and raising the taxation threshold for stock investment gains constitute a 'wealth tax increase.' It is estimated that 150,000 people will be subject to taxation on stock investment gains exceeding 50 million won annually, 16,000 people will be affected by the top income tax rate increase, and 511,000 people will pay the housing portion of the comprehensive real estate tax.

◆ Exports and Imports Both Down About 13% from the 1st to the 20th = Due to the global economic downturn caused by the COVID-19 crisis, our exports and imports both decreased by about 13% compared to the previous year until the 20th of this month. Automobile exports fell by 14%, and petroleum product exports plummeted by 41.6%. As the trade market shows no signs of recovering from the COVID-19 shock, a positive rebound in exports in the third quarter is unlikely. According to the July 1-20 export-import status (provisional customs clearance basis) announced by the Korea Customs Service on the 21st, exports during this period recorded 24.6 billion dollars, down 12.8% (3.6 billion dollars) from the same period last year. Imports during the same period were 24.8 billion dollars, down 13.7% (3.93 billion dollars) from last year. The trade balance showed a deficit of 150 million dollars. The number of working days during this period was 15.5 days, one day less than last year. Considering the number of working days, the average daily export amount was 1.59 billion dollars, down 7.1% from last year. With the sharp decline in exports of major items such as automobiles due to the impact of COVID-19, the overall exports for this month are expected to be negative. Given Korea's economic structure that relies heavily on exports, if export sluggishness continues into the third quarter, it is expected to have a negative impact on this year's economic growth rate.