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The Korea Development Institute (KDI), a state-run think tank, lowered its forecast for South Korea’s 2020 economic growth rate to -1.1%, down 1.3 percentage points from the 0.2% it predicted in May. It also reduced its 2021 forecast by 0.4 percentage points to 3.5%. Its figures were based on predictions that in addition to the economic contraction observed in the first half of this year, the economic recovery in the second half would be slowed by the recent resurgence of COVID-19.

The predictions were released by the KDI on Sept. 8 in a “Revised Economic Outlook” report. The numbers were higher than those forecast by the International Monetary Fund (IMF, -2.1%) or the Bank of Korea (BOK, -1.35%) and lower than those shared by private South Korean research institutions such as the LG Economic Research Institute (-1%) and the Hyundai Research Institute (-0.5%). The South Korean government has not officially revised its growth rate prediction of 0.1% from last June, but it has also acknowledged the negative growth rate effects of the virus’s resurgence. The KDI typically releases two economic outlook reports every year. This is the fourth time that it has released a separate revised outlook, following previous ones in 2008 and 2009 amid the global financial crisis and another in 2012 amid growing uncertainty about the global economy sparked by a financial crisis in Europe.

As its main reason for lowering its growth rate prediction, the KDI pointed to the slowing of private consumption and exports with the virus’s resurgence. The report projected a 4.6% decline in private consumption this year, with a rebound of 2.7% predicted for next year. Both figures were reduced further from the respective predictions last May, which foresaw a 2% decline this year and a 5.3% increase next year. In addition to declining consumption due to COVID-19’s spread -- especially in the case of services involving large amounts of face-to-face contact -- it also predicted that the reduction in incomes amid the economic slowdown would deal a further blow to consumption.

Exports have been gradually recovering from a steep drop during the first half of the year. But with the slow rate of the recovery, the KDI predicted a decline of 4.2% this year and an increase of 3.4% next year -- both numbers lowered from the previously predicted 3.4% decline this year and 4.9% increase next year. Owing to baseline effects and social overhead capital (SOC) investment, facility and construction investment at least were predicted to respectively rise by 4.2% and 1.1% this year and 4.8% and 3.1% next year. Employment was expected to shrink by 150,000 jobs this year amid a job market crunch, particularly in service industries with large amounts of face-to-face content, but increase again by 150,000 jobs next year.

The KDI also predicted that whether the virus continues to spread will significantly impact the growth rate. The economy may recover quickly next year if treatments or vaccines are developed in the near future, or it may decline further if the virus’s resurgence persists and social distancing practices are intensified.

“The growth rate prediction of -1.1% is based on the presumption that the virus [resurgence] will abate in September and social distancing will remain at Level 2 or lower during the fourth quarter,” explained Jung Kyu-chul, director of the KDI’s office of macroeconomic analysis and forecasting.

“If distancing progresses to Level 3, the growth rate will fall further,” he predicted.

With its predictions of shrinking private consumption and negative growth, the KDI underscored the importance of fiscal and monetary policy. The report raised the need to increase the efficiency of fiscal expenditures by focusing government support on protecting hard-hit vulnerable demographics, while maintaining an easing approach with monetary policy to respond to the economic slowdown and low prices.

“With the virus impacting different economic actors in very different ways, an efficient approach would be to focus economic benefits on the segments suffering the most damage,” Jung said.

By Lee Jeong-hun, staff reporter

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