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Lee Ju-yeol, governor of the Bank of Korea, speaks at a press conference on monetary policy at the Bank of Korea on Aug. 27. (provided by the Bank of Korea)

Amid concerns that the resurgence of COVID-19 in South Korea will cause a second economic shock, the Bank of Korea (BOK) lowered its projection for this year’s economic growth rate by 1.1 points, its first adjustment in three months. Korea is facing difficult circumstances both at home and abroad: tougher social distancing measures will inevitably cause domestic spending to contract, while shrinking trade will cause exports to fall.

BOK’s revised forecast, released on Aug. 27, focused on estimating the length of the second wave of COVID-19. Bank researchers noted that Korea saw more than 100 daily cases of COVID-19 for 41 days during the first wave, in February and March; applying that model to the second wave suggests that the COVID-19 caseload will subside around October.

Under those assumptions, BOK predicted that Korea would have yearly growth of -1.3%. But if the domestic surge continues until the winter and the global spread of the disease isn’t contained before the end of 2021, playing out a pessimistic scenario, the growth rate would be as low as -2.2%, the bank predicted.

Experts offered mixed responses to BOK’s predictions. “So far, the projections from domestic and foreign institutions have been optimistic. The most reliable figure was the OECD’s prediction of -2.5% in June, which was predicated on a second wave,” said Cho Young-mu, an analyst with the LG Economic Research Institute.

Joo Won, chief of the economic research office at the Hyundai Research Institute, offered a different perspective. “There isn’t a linear relationship between the COVID-19 outbreak and economic vitality. I don’t think our economic growth rate this year will fall below -1%.”

BOK predicted that the economic growth rate in the second half of the year (relative to the same period last year) would be -1.8%, lower than the -0.8% calculated for the first half of the year. The bank predicted that the third and fourth quarters would see around 1.5% growth compared to the previous quarter.

Experts are concerned that private consumption will be as sluggish as it was in the first quarter. The COVID-19 surge has the worst impact on the employment and income of vulnerable groups, such as the self-employed. In the first quarter, private consumption fell by 6.5% and service sector output by 2.4%, dragging down the growth rate.

BOK also predicted that private consumption would recover slowly for some time because of the prolonged COVID-19 outbreak. Bank analysts say that the delayed return of employment to the service sector, an area vulnerable to the COVID-19 crisis, will combine with the slowdown in the manufacturing sector to slash employment by 210,000 jobs in the second half of the year alone.

The gradual recovery in South Korea’s exports is likely to be hampered by the continuing spread of COVID-19 in South Korea’s major export markets, such as the US and Europe. While major countries are ending lockdowns, it’s taking a long time for economic activity to return to normal. BOK projected that exports will be down 5.6% in the second half of the year and 4.5% over the year as a whole.

“The fact that export performance (-16.6%) in the second quarter fell short of expectations was one of the factors behind our downward adjustment of the growth rate,” explained Lee Ju-yeol, BOK governor, in a press conference on Thursday. As a result, the bank predicted that South Korea’s current account surplus will fall from US$60 billion last year to US$54 billion this year.

When BOK’s growth projections are broken down by expenditure category, the domestic market fell sharply from 1.4 points last year to 0.1 points this year, while exports declined from 0.6 points last year to -1.4 points this year.

Despite the big drop in its growth rate projection, the bank left the base interest rate frozen at 0.5% for the year. Lee Ju-yeol offered the following explanation for the rate freeze. “We need to wait and see what effect the government’s expansionary fiscal policy and its measures to stabilize the real estate market may have.”

“Lowering the interest rate remains an option for responding [to the economy]. However, we need to approach any additional rate decreases carefully while weighing the expected benefits and side effects,” Lee added.

By Han Gwang-deok, finance correspondent

Please direct comments or questions to [english@hani.co.kr]