Ⅰ. Current Economic Conditions

• During 1Q, the negative impact of COVID-19 was most evident in the service industry due to in-person services.

• Private consumption has fallen by a sizable margin amid a decline in GDI and worsening consumer sentiment as the import of services dropped sharply due to the overseas travel ban.
• The sluggishness in facilities and construction investment is easing on improvements in semiconductor-related machinery and the civil engineering sector.
• Exports are fast decelerating on cross-border restrictions imposed by major countries in the fight against COVID-19, becoming the primary factor that is weighing down growth momentum.

• The future macroeconomic trajectory is contingent on how the world deals with COVID-19. As such, controlling the disease is a prerequisite not only for reducing the death toll but also for smoothly restarting the economy.

• Fiscal policies should accelerate the budget execution process in order to support vulnerable groups and to ease the reduction in private demand.
• To tackle the downward pressure on economic activity and inflation resulting from COVID-19, monetary policies need to employ non-conventional instruments after the base rate is cut down to the lowest possible level at the earliest possible time.
• Large-scale corporate bankruptcy and lay-offs could diminish production capacity, putting a drag on the rebound following a recovery from COVID-19. Thus, the government should move actively to protect the economic system through policy programs for liquidity provision and job security.
• As the global economy slows on the worldwide spread of COVID-19, continued efforts are needed for international coordination and cooperation.

• Care must be taken to ensure that the extensive support programs aimed at countering the COVID-19 crisis do not hinder the development of new growth engine industries by consistently interfering with the sound entry and exit of private firms.
• To prevent the short-term fiscal expansion from leading to deterioration in the mid- to long-term fiscal soundness, the government should clarify its plans for and commitment to stable fiscal management in the post-COVID-19 era.
• In addition, efforts are needed to strengthen international cooperation to stop the global spread of COVID-19 from loosening global value chains and escalating trade protectionism.

• More flexibility is needed in the economic structure to aid in the seamless reallocation of resources to new growth industries that will emerge in the wake of COVID-19.
• In the long run, the education system should be reformed to swiftly adapt to the rapid changes in the economic environment including an expansion of public healthcare and the IT industry.

Ⅱ. Domestic Economic Outlook for 2020-2021

1. Expected External Conditions

• The IMF projected that, due to the spread of COVID-19, the global economy will exhibit a reversed growth (-3.0%) in 2020 then gradually recover with a growth of 5.8% in 2021.

2. Outlook for Domestic Economy

• Private consumption will take a nose-dive, especially in services. As the internal spread of COVID-19 slows, domestic consumption by residents will bounce back relatively fast, but overseas consumption by residents will remain weak into 2021 due to the continued restrictions on cross-border movements.
• Facilities investment will grow at a slow pace reflecting the impact of COVID-19, regardless of the recovery in global demand for semiconductors and the base effect from last year.
• Construction investment will gradually pick up from the sluggishness that has continued from 2018 on improvements in the civil engineering sector, especially in SOC.
• Exports and imports will see huge losses for the time being due to COVID-19, followed by a gradual moderation led by goods exports from 2H 2020.

• The number of employed persons in 2020 will maintain last year’s level as government programs partly offset the shock to the service industry (face-to-face interactions). The figure will gain approximately 200,000 in 2021 as the contraction in employment moderately eases.

3. Risks

• If the global spread of COVID-19 wanes quickly, the negative impact will have a short-lived and limited effect on the service industry. From 2H, the Korean economy will exhibit a fast rebound.
• However, if COVID-19 is prolonged, the Korean economy will see a huge drop in investment and exports and a delayed recovery while its mid- to long-term growth path may face a downward adjustment.

Ⅲ. Policy Recommendations

1. Fiscal Policy

• Taking into account the high level of uncertainty, additional fiscal spending, if needed, can be considered, but a close preemptive examination is required of increasing expenditures that can become permanent fixtures.

• In the mid- to long-term, to secure fiscal sustainability, the government should fully control the increase in spending through strategic expenditure restructuring while exploring policy alternatives to supplement the fiscal revenue.
  

2. Monetary Policy

• Even if inflation partly rebounds on an economic recovery or on rising agricultural product and oil prices, the monetary authority should wait to normalize monetary policy until the inflation rate is firmly anchored to the target.