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Business & Finance

South Korea set to post largest GDP contraction since 2008

This would be the worst contraction since a 3.3% drop in the final quarter of 2008, and the first since the Sino-U.
21 Apr 2020
  • This would be the worst contraction since a 3.3% drop in the final quarter of 2008, and the first since the Sino-U.S. trade war hit growth in the first quarter of 2019.

SEOUL:  South Korea’s economy likely shrank at its sharpest pace since 2008 in the first quarter as the coronavirus health crisis ravaged business activity and global demand, a Reuters poll showed on Tuesday.

Gross domestic product (GDP) for the January-March period is expected to have contracted a seasonally adjusted 1.5% from the previous quarter, when it grew 1.3%, the median forecast from the survey of 10 economists showed.

This would be the worst contraction since a 3.3% drop in the final quarter of 2008, and the first since the Sino-U.S. trade war hit growth in the first quarter of 2019.

“The South Korean economy should have contracted sharply in the first quarter due to both supply and demand-side shocks caused by the COVID-19 outbreak,” DBS economist Ma Tieying said. “This is evidenced by the sharp decline in industrial production, retail sales and consumer confidence.”

Despite plateauing infections locally, new risks come from the pandemic’s hit to South Korea’s exports, she added.

Exports plunged nearly 27% in the first 20 days of April, with those to China tumbling 17.0%, and those to the United States and European Union slumping 17.5% and 32.6%, respectively.

From a year earlier, the economy was seen growing 0.6% in the first quarter, slowing from 2.0% growth seen three months earlier.

To shore up the economy, the government has proposed a 7.6 trillion won ($6.17 billion) extra budget, which follows the 11.7 trillion won stimulus approved by parliament in March, plus a 100 trillion won economic rescue package.

The Bank of Korea (BOK) has slashed interest rates by 50 basis points and rolled out quantitative easing.

Ha Keon-hyeong, Shinhan Investment Corp economist, however, expects the export slump to worsen in the second quarter, and that stimulus will only help lift the economy by 0.5 to 1.0 percentage point.

WORSE TO COME

For 2020, Asia’s fourth-largest economy is tipped to shrink 0.1%, according to the median of 11 analysts in the Reuters poll, which would be the biggest decline in more than two decades. The International Monetary Fund (IMF) sees an even bigger 1.2% contraction.

Earlier this month, BOK Governor Lee Ju-yeol said another interest rate cut could be needed as the bank trimmed its 2020 GDP projection to less than 1%, below its earlier forecast of 2.1%.

“The problem is that the global economic shock due to the coronavirus spread across the globe could materialize in earnest in the second quarter, which would pull down the country’s exports and growth drastically,” Hi Investment & Securities economist Park Sang-hyun said.

The BOK releases advance first quarter GDP estimates on Thursday.