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(2nd LD) BOK expects Korean economy to retreat sharper than expected on pandemic

All News 13:30 August 27, 2020

(ATTN: UPDATES with more details throughout; ADDS photos)
By Kim Soo-yeon

SEOUL, Aug. 27 (Yonhap) -- The Bank of Korea (BOK) on Thursday sharply lowered its economic growth outlook for the South Korean economy for the year, expecting a sharper than expected contraction of 1.3 percent amid the deepening virus fallout.

The latest projection for Asia's fourth-largest economy marked a sharp cut from the central bank's estimate in May of a 0.2 percent contraction.

It would mark the worst performance since 1998, when the Korean economy shrank 5.1 percent in the aftermath of the 1997-98 Asian financial crisis.

The bank also lowered its 2021 growth outlook to 2.8 percent from its earlier estimate of 3.1 percent expansion amid the pandemic-caused economic uncertainties.

The downward revision came as downside risks have heightened amid the prolonged COVID-19 outbreak and concerns about a nationwide pandemic.

"The economy is forecast to improve gradually but at a slower pace than expected," the BOK said in a statement.

"While the slump in exports will ease gradually, the recovery of private consumption is expected to be constrained by the recent resurgence of COVID-19 in Korea," it added.

Earlier in the day, the BOK kept the policy rate steady at a record low of 0.5 percent in a bid to gauge economic fallout from spiking virus cases.

This file photo, taken on June 1, 2020, shows stacks of import-export cargo containers at South Korea's largest seaport in Busan, 450 kilometers southeast of Seoul. (Yonhap)

In the wake of the first wave of the virus outbreak, the South Korean economy showed some signs of recovery on eased slumps in exports and domestic consumption, backed by firm outbound shipments of key items, such as chips, and massive fiscal spending.

But South Korea's new virus cases spiked to a near six-month high of 441 Thursday, with almost 4,000 new cases across the nation identified over the past two weeks.

The Korean economy contracted 3.3 percent on-quarter in the second quarter, as exports tumbled due to the fallout of the pandemic.

Policymakers earlier expected the economy's marked rebound in the third quarter on the back of massive fiscal spending and eased slumps in overseas shipments.

But the latest uptick in virus cases has cast a grim outlook for the growth path, experts said.

The Organization for Economic Cooperation and Development (OECD) earlier predicted that South Korea's economy is likely to shrink 0.8 percent in 2020 on-year thanks to its successful response to the pandemic.

But if another wave of the virus outbreak occurs, the economy is expected to contract 2 percent this year, it said.

The BOK's growth projection is far lower than the government's forecast in June of 0.1 percent expansion.

Meanwhile, the BOK slightly raised its 2020 inflation forecast to 0.4 percent from its previous projection of a 0.3 percent rise. But it expects inflation to grow 1 percent next year, slightly lower than its earlier estimate of 1.1 percent.

Citizens wait in line to receive coronavirus tests at a screening center in the southwestern city of Gwangju on Aug. 27, 2020. (Yonhap)

Exports, which account for about 50 percent of the South Korean economy, are forecast to slide 4.5 percent this year, sharper than its previous estimate of a 2.1 percent decline. The BOK expects overseas shipments to increase 4.8 percent in 2021.

The central bank said private spending is expected to recover at a slower pace than anticipated as consumer sentiment will remain weak amid the prolonged COVID-19 pandemic.

Consumer spending is likely to retreat 3.9 percent in the year, compared with the central bank's earlier projection of a 1.4 percent contraction. Next year, private spending is expected to increase 3.8 percent.

Facility investment is expected to grow 2.6 percent this year on the back of the investment in chips. Next year, it will likely jump 6.2 percent.

Construction investment is projected to retreat 0.7 percent in 2020 and shrink 0.4 percent next year.

The BOK, meanwhile, lowered its 2020 outlook for the current account surplus, citing sluggish global trade.

The surplus is forecast to reach $54 billion this year, smaller than its previous estimate of $57 billion. The 2021 surplus is likely to reach $55 billion, it added.

As for job growth, the BOK presented a bleaker outlook compared with in May.

The number of the employed is expected to decline by 130,000 this year, a turnaround from its earlier estimate of an increase of 30,000. But in 2021, the tally is expected to increase by 200,000.

This file photo, taken Aug. 4, 2020, shows citizens shopping for groceries at a large discount store chain in Seoul. (Yonhap)

sooyeon@yna.co.kr
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