South Korea’s economy in the first quarter suffered the worst contraction since the global financial crisis, with a darkening outlook for global trade suggesting that the nation might fail to grow this year.
GDP shrank 1.4 percent in the three months through last month from the prior quarter, slightly above economists’ forecast of a 1.5 percent contraction, the Bank of Korea said yesterday.
Falling consumption was the biggest drag as the COVID-19 pandemic 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 US, 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 is still likely to have fared far better than other major economies, a testament to the nation’s success in containing the virus without lockdowns.
The outlook now depends largely on how strongly consumption rebounds, the speed of stimulus efforts and the depth of the global trade slump.
South “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,” Carnell wrote.
Shocks to South Korea’s trade-reliant economy could widen this quarter as the global recession deepens, the South Korean Ministry of Finance said in a separate statement.
Another wave of virus cases could also complicate efforts to offset trade headwinds with consumer spending, the ministry said.
South Korea is considering relaxing its social distancing rules and reopening schools next month, but disease control officials have warned that the odds of a second outbreak are high.
Bank of Korea Governor Lee Ju-yeol this month said that the economy would probably eke out growth this year, but at a rate of less than 1 percent.
Central bank statistics official Park Yang-su, speaking after the GDP report, said that 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,” Park said.
Government 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 (US$199 billion) in spending, loans and guarantees to shore up the economy.
“South Korea got its outbreak over with faster than other advanced economies did,” DB Financial Investment strategist Moon Hong-cheol said. “What happens in the second-quarter depends a lot on how quickly stimulus measures can be passed.”
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