South Korea’s economy suffers worst contraction since 2008

According to Bank of Korea, the country's GDP shrank 1.4% in the three months through March from the prior quarter, due to fall in consumption.

Representational image | Bloomberg

Seoul: South Korea’s virus-hit economy suffered the worst contraction since the global financial crisis in the first quarter, with a darkening outlook for global trade suggesting the country may fail to grow this year.

Gross domestic product shrank 1.4% in the three months through March from the prior quarter, slightly above economists’ forecast of a 1.5% contraction, according to the Bank of Korea. Falling consumption was the biggest drag as the coronavirus weighed on sentiment and kept people homebound.

From this quarter, the main risk to South Korea’s growth is global trade as markets in the U.S., Europe and Japan grind to a halt. Chip exports, the country’s biggest source of income, appear to be losing momentum again as the pandemic hurts demand.

As bad as South Korea’s economy performed last quarter, it’s still likely to have fared far better than other major economies, a testament to the country’s success in containing the virus without having to resort to lockdowns. The outlook now depends largely on how strongly consumption rebounds, the speed of stimulus efforts and the depth of the global trade slump.

“Korea was in control of its Covid-19 outbreak much earlier than anywhere else apart from China,” wrote Robert Carnell, chief economist for Asia Pacific at ING Groep NV in Singapore. “Most of the weakness in 2Q will relate to the global backdrop rather than domestic weakness.”

Shocks to South Korea’s trade-reliant economy could widen this quarter as the global recession deepens, the finance ministry warned in a separate statement Thursday.

Another wave of virus cases could also complicate efforts to offset trade headwinds with consumer spending. South Korea is considering relaxing its social distancing rules and reopening schools in May, but disease control officials have warned that the odds of a second outbreak are high.

Bank of Korea GovernorLee Ju-yeol this month said the economy will probably eke out growth this year, but at a rate of less than 1%.

A BOK statistics official, speaking after the GDP report, said growth this year would require semiconductor exports gathering momentum and the virus being brought under control at home and abroad.

“If all of these factors combine to serve as a positive factor, it wouldn’t be a very bad growth figure,” said the official, Park Yang-su.

Government’s stimulus kept the first quarter contraction from being worse and is likely to continue to play a significant role.

So far, the government has pledged at least 245 trillion won ($199 billion) in spending, loans, and guarantees to shore up the economy. President Moon Jae-in called Wednesday for a third emergency budget and a “Korean-style New Deal” to create jobs longer term.

That came after South Korea last week unveiled a second extra budget worth 7.6 trillion won to pay for cash handouts to millions of mid-to-lower income families. The ruling party has since called for expanding the payments to all households, although the government and the opposition party oppose the idea as too expensive.

“South Korea got its outbreak over with faster than other advanced economies did,” said strategist Moon Hong-cheol at DB Financial Investment. “What happens in the second-quarter depends a lot on how quickly stimulus measures can be passed.”-Bloomberg