Fourth wave of COVID-19 pandemic will slow S. Korea’s economic recovery

Posted on : 2021-07-08 17:17 KST Modified on : 2021-07-08 17:17 KST
If the COVID-19 crisis drags on, the growth rate could be as low as 3.4%, the BOK predicted
People wait in line at a temporary screening center set up in a public health office in Seoul to get tested for COVID-19 on Wednesday. (Yonhap News)
People wait in line at a temporary screening center set up in a public health office in Seoul to get tested for COVID-19 on Wednesday. (Yonhap News)

South Korea is facing a fourth wave of the COVID-19 pandemic, which may well obstruct the government and central bank’s plans to normalize economic policy.

Given recent signs of a strong recovery in the Korean economy, the government set a goal of over 4% growth while planning aggressive economic stimulus measures for the second half of the year, while the Bank of Korea (BOK) has repeatedly signaled to the market that it will raise interest rates. But the surge of COVID-19 cases in the greater Seoul area is an unexpected variable that’s likely to complicate that stance on policy.

Over the past two months, the government has yanked up the Korean economy’s projected growth rate for this year from above 3% to above 4% range. The move reflected confidence about an economic recovery and the easing of the COVID-19 crisis.

According to an economic forecast in May, the BOK said that the COVID-19 vaccination program could elevate this year’s economic growth rate from 3.4% to 4.8%. That is, a major expansion of inoculations and a gradual fall in infections in the second half of the year would enable 4.0% growth, while an even faster recovery could enable 4.8% growth.

But if the COVID-19 crisis drags on, the growth rate could be as low as 3.4%, the BOK predicted.

A definite resurgence of COVID-19 in defiance of predictions would likely impose changes on the scenario of normalizing economic policy laid out by the government and the BOK, which is counting on a plus-4% growth rate. Spending coupons, cashback, and other disaster assistance that the government has planned to stimulate the domestic economy could directly collide with disease control measures.

A bigger problem is that the plan to normalize monetary policy is bound to be undermined by big-picture considerations. Since the end of May, the BOK has actively sought to set the mood for raising the base rate, which is currently at 0.5%, the lowest in history.

After the market’s response failed to meet BOK’s expectations, it noticeably sharpened the tone of its comments over the past month.

BOK Governor Lee Ju-yeol began by talking about “normalizing monetary policy” on May 27, and Deputy Governor Park Jong-seok sent an even stronger signal about one or two interest rate hikes on June 10. Then on June 24, Lee plainly stated that a rate hike will take place “within the year.”

While Lee’s remarks in May led market observers to believe the rate hike would come next year, the market has recently pulled forward its expected timeframe, first to October or November of this year, and then to July or August.

As recently as May 28, the yield on three-year treasury bonds was 1.162%. But the yield rose to 1.465% on July 6 now that investors assume there will be a rate hike this year.

On top of that, the BOK has also been building a rationale for a rate hike. That includes predictions that the economy will rebound enough to counter the overheated property market and that inflation will reach close to 2%.

An increasing number of hawks — who prefer tight fiscal policy — on the BOK’s Monetary Policy Board think it’s time to prioritize the financial imbalance.

But if a new wave of COVID-19 curbs the recovery in the real economy, it would naturally spoil the mood for a rate hike. That’s also likely to create confusion in the market, which had belatedly geared up for the impending hike.

“The market didn’t respond to Lee Ju-yeol’s remarks in May, so the bank came on a bit too strong in June about a rate hike this year. That’s led the market to prepare for several board members having a minority opinion in the board meeting in July,” said Yun Eo-sam, an analyst with Meritz Securities.

“If [the BOK] delays a rate hike after sending these strong signals, it will create problems for communication with the market.”

By Jun Seul-gi, staff reporter

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