Government Expects V-Shaped Recovery... But South Korea Faces Gloomy Second Half, Exports Are Key

Bank of Korea to Announce Revised Economic Outlook at the End of This Month

[Asia Economy Reporter Kim Eun-byeol] As the government hopes for a 'V-shaped rebound' in the second half of the year despite the impact of the novel coronavirus disease (COVID-19), economic experts' outlooks are not very optimistic. There are even analyses suggesting that the second half of the year will be more difficult than the first half.

LG Economic Research Institute presented a forecast of -1.0% for South Korea's economic growth rate this year in its report titled '2020 Domestic and International Economic Outlook,' released on the 6th. This figure is lower than the average forecast of overseas investment banks (IBs) at -0.8%, but higher than the -1.2% and -2.1% projections by the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF), respectively.

The institute predicted that the Korean economy will record a 1.0% contraction in the second half, worsening from the first half's (-0.8%) performance. Although the economy has shown signs of recovery since May, it is expected to be a temporary rebound. The analysis suggests that with daily new COVID-19 cases ranging between 50 and 100 continuing, the reluctance toward face-to-face consumption will persist for some time, making it difficult for production and other activities to return to normal levels. The institute stated, "The domestic economy will rebound relatively quickly until the early third and fourth quarters, but the pace will slow down afterward, resulting in negative growth compared to the previous year even in the fourth quarter."

In particular, the institute expressed concerns that the low export performance due to COVID-19 could deepen the low-growth trend. Since the spread of COVID-19 has not stopped in major export destinations such as the United States, there is a high possibility that exports will continue to record negative figures.

The forecasts for South Korea's economic growth rate by overseas investment banks (IBs) have also been uniformly revised downward this year. According to the International Finance Center's compilation as of the end of July, the average growth rate forecast for South Korea by nine global IBs was -0.8%, a 4 percentage point drop from the previous month. The average forecast at the end of January was 2.2%, which declined to 2.0% at the end of February, 0.9% at the end of March, and sharply dropped to -0.9% at the end of April.

Domestic economic experts also forecast that the Korean economy will record a growth rate of -0.9% this year, a significant decline compared to last year's 2.0%.

The Korea Development Institute (KDI) announced on the 9th in its 'KDI Economic Trends (August issue)' that a survey conducted last month among 21 domestic economic outlook experts (with 20 responses) yielded such results. KDI explained, "As negative views on the overall domestic economy have strengthened, the 2020 economic growth rate forecast has been revised downward by 0.6 percentage points compared to the April survey (-0.3%)."

Economic experts who responded to the KDI survey also cited sluggish exports as a concern. Experts forecast that exports (in terms of value) will remain sluggish throughout this year due to the global economic recession, decreasing by 9.5%, and then increasing by 5.9% next year.

This suggests that exports this year will perform worse than the 5.8% decline predicted in the April forecast. Accordingly, the current account surplus this year is expected to shrink to $42.5 billion, down from last year, and slightly expand next year. The current account surplus forecast for this year has been revised downward from the April forecast of $54.2 billion and is also significantly lower than the Bank of Korea's forecast of $57 billion. The Bank of Korea had previously expected that the forecast would be achievable under the current trend.

Meanwhile, the Bank of Korea will revise and announce its economic growth rate forecast for this year at the end of this month. The Bank had previously forecast a growth rate of -0.5% for the first half and -0.2% for the full year, but adjustments are inevitable. The real gross domestic product (GDP) growth rate for the second quarter, announced by the Bank of Korea at the end of July, fell by 3.3% quarter-on-quarter, marking the largest drop since the foreign exchange crisis.