AuthorOffice of Macroeconomic Analysis and Forecasting
KDI Report VOD
How will COVID-19 change our economy?
To date, the economic growth rate has fallen 1.3%, and the contraction has been mainly centered around the service industry.
If the global spread of COVID-19 is short-term, the economy will be able to regain momentum as the service industry recovers.
But, if the health crisis becomes protracted, a global recession will ensue, and the consumption of durable goods and investment will contract.
The impact will be especially big for Korea compared to other countries due to its dependence on the manufacturing industry which primarily exports capital and intermediate goods which are closely tied to investment.
In order to predict how the Korean economy will be affected, KDI constructed and analyzed different hypothetical scenarios.
Firstly, if the number of infection cases decreased from the first half in Korea and from the second half overseas, growth is expected to mark 0.2% in 2020.
The domestic consumption of foreigners, which lost momentum in the first half, will exhibit a rebound in the second.
However, due to the very slow easing of social distancing measures and travel bans, the overseas spending of residents’ and domestic spending of foreigners’ will remain sluggish into the coming year.
Exports will gradually recover from the latter half as overseas investment picks up. And, the recovery in employment will be delayed even if domestic economic activities normalize in the second half.
It is also expected that next year’s GDP will fail to return to the previous trajectory. Secondly, if the global spread of COVID-19 is decelerated by the development of treatments and a vaccine, growth will post 1.1%.
Consumption by both domestic and foreign tourists will stall until year-end due to fears over traveling abroad under the current conditions. Nevertheless, a recovery could be seen in domestic consumption, exports and employment as global investments rally, and GDP could get back on track by the end of 2020.
Lastly, if a second wave of COVID-19 sweeps across the globe, economic sentiment will continue to contract, and growth will fall to the –1.6% range.
Exports will exhibit a sharp drop and then slowly recover from next year, while consumption remains sluggish.
If vulnerable firms and households go bankrupt, and unemployment becomes rampant, the subsequent non-performing loans could push the financial market into a liquidly crisis.
Ultimately, even if COVID-19 is reigned in, the economic recovery will be slow, and overall productivity will be diminished, GDP will continue to hover significantly below previous levels in 2021 and there may be downward adjustments in the mid- to long-term. Mid- to long-term outlook
(Interview with the author)
COVID-19 is rapidly curtailing Korea’s economic growth trend. If large corporations file for bankruptcy and unemployment rises, the recession will exacerbate, and a recovery will become even more difficult. Therefore, we need active policies in place to provide hard-hit households and firms with loans and to protect our jobs. However, to ensure that these efforts are not seen to be draining Korea’s mid- to long-term fiscal soundness, the government will have to announce clear plans on how it will manage the country’s finances after the health crisis and show a willingness to do so. Also, measures are needed so that the resources provided through extensive support policies do not continue to be injected into declining industries, restricting the development of new growth engines.
Moreover, cooperation is needed on a global scale to respond to the economic damage from COVID-19 through delayed loan repayments for emerging economies and currency swaps.
■ The analysis finds that Korea’s GDP will most probably slip significantly below the previous path due to COVID-19, and the future trend is still very uncertain.
■ Short-term responses to the pandemic should focus on the prevention of a further spread while at the same time policy programs are put into place to mitigate the negative economic impact and reboot the economy,
■ After the COVID-19 crisis, efforts must be made to prevent temporary countermeasures from damaging productivity and efficiency of resource allocation.
Providing Economic Forecast and Macroeconomic Policy Direction, the Groundwork for a Brighter Future
The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.
Economic trend analysis, short- and long-term forecast
Policy study on macroeconomic management
Basic structural analysis on macroeconomic areas
Maintenance of multi-sectoral dynamic macroeconomic model
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