OECD Economic Outlook, Volume 2020 Issue 2

Korea

Effective measures to contain the spread of COVID-19 have limited the estimated fall in GDP to just over 1% in 2020, the smallest decline in the OECD. Activity is picking up on the back of a rebound in consumption, bolstered by large government transfers to households, and a recovery in exports, led by semiconductors. The sizeable digital and green investments of the New Deal will buttress the recovery. GDP is projected to grow at about 3% per annum in 2021 and 2022, but the recovery remains vulnerable to a further spread of the virus in Korea or abroad until an effective vaccine is deployed in the latter half of 2021.

Policies need to continue supporting households and businesses until the economy is on a firmer recovery path. Relatively low public debt allows an expansionary fiscal policy and the announced fiscal rules will help reinforce long-term sustainability in the face of rapid ageing. Beyond an immediate stimulus to the economy, the New Deal constitutes an opportunity to boost productivity, inclusiveness and green growth. Effective implementation is key and outcomes should be monitored closely to ensure maximum impact.

A resurgence of COVID-19 was contained, but many jobs have been lost

A resurgence of COVID-19 infections in mid-August led to stricter distancing measures for almost two months, which have stemmed the spread of the virus so far. The government eased the distancing guidelines in mid-October and higher-class attendance was allowed in all schools. The Google mobility indicator for retail and recreation rebounded following a sharp contraction in late August and September. However, in November, distancing rules were tightened for the operation of facilities such as bars and restaurants and school attendance was limited in some areas.

Korea: Mobility and exports

1. Mobility trends for places like restaurants, cafés, shopping centres, theme parks, museums, libraries, and movie theatres.

2. Deviation from the baseline. The baseline is the median value, for the corresponding day of the week, during the 5-week period from 3 January to 6 February, 2020.

Source: Google LLC, Google COVID-19 Community Mobility Reports, https://www.google.com/covid19/mobility/.; and Kore Customs Service.

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Korea: Demand, output and prices

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The economy is recovering gradually

Private consumption is gradually recovering, and a 31% surge in online shopping in September compared with a year ago has boosted retail sales. The alleviation of distancing recommendations, along with government support to households, has propped up labour-intensive services, such as tourism, hotels, restaurants and culture, where activity nevertheless remains relatively low. About 421 000 jobs have been lost economy-wide over the 12 months to October. Exports have bounced back, led by semiconductors and automobiles. Investment has held up relatively well so far, despite weak demand and high uncertainty.

Expansionary policy has damped the COVID-19 shock

The government has introduced massive policy support, totalling KRW 285 trillion (about 15% of GDP) so far, including extra budget easing, liquidity provisions and credit guarantees, to mitigate the COVID‑19 impact. The national assembly passed four supplementary budgets, worth KRW 67 trillion (3.5% of GDP), of which about 70% will be debt-financed. General government net lending is expected to move from a surplus of 0.9% of GDP in 2019 to a deficit of 4.2% of GDP in 2020, and gross public debt is projected to rise above 48% of GDP in 2022. This fiscal expansion is appropriate given economic conditions. At the same time, the recently planned introduction of fiscal rules limiting the general government deficit to 3% of GDP and gross government debt to 60% of GDP from 2025 onwards is welcome, especially as ageing will push up welfare spending. The Bank of Korea has maintained the policy rate at 0.5% since May 2020, following cuts totalling 75 basis points earlier this year, and provided ample liquidity. Headline inflation rose to 0.1% and core inflation fell to 0.3% (year-on-year) in October, calling for monetary policy to remain accommodative.

Steady economic growth is projected over the next two years

GDP is projected to increase by 2.8% and 3.4% in 2021 and 2022 respectively. The easing of distancing rules with the rollout of an effective vaccine will allow a gradual recovery of services, which will lift employment. Strong growth in government consumption and transfers provide a major boost to the economy, and the “New Deal” will support investment. Exports are expected to expand further as the global economy picks up, and a potential easing in US-China trade tensions would impart additional momentum. The recently signed Regional Comprehensive Economic Partnership agreement will also support exports. The accelerated pace of digitalisation worldwide is set to boost demand for semiconductors and electronic products. Nevertheless, uncertainty remains unusually high, especially regarding the strength of the demand for exports, which are crucial to the Korean economy.

The recovery is still vulnerable to the global environment

Some households, notably those comprising non-regular workers, and industries, especially in services, still face very challenging conditions. Support to households needs to be targeted towards those most in need. Temporary support to companies, such as tax and social security deferrals and reductions, may need to be extended. However, some jobs and companies are likely to disappear permanently, as the crisis has affected demand patterns durably and accelerated ongoing trends, in particular digitalisation. Hence, encouraging the restructuring of firms and investing in training and upskilling is essential to make the most of the “New Deal” and foster digital, green and inclusive growth.