The Strategist

South Korea falls into recession after COVID-19 crisis

07/24/2020 - 06:44

South Korea, one of the few countries that managed to stop the spread of COVID-19 at an early stage and avoided the introduction of a national confinement, nevertheless faced an economic recession. According to the results of the second quarter of this year, the decline amounted to 2.9% in annual terms. The reason for this was the sharp drop in exports, on which the South Korean economy largely depends.

South Korea's GDP decreased by 3.3% (seasonally adjusted) in the second quarter of this year, compared with the first quarter. In annual terms, the decline was 2.9%, according to the Bank of Korea. In the first quarter, the decline was 1.4% and 1.3%, respectively. In both quarterly and annual terms, this is the strongest fall in GDP since 1998.

The decline in GDP for two quarters in a row means that the economy is entering a technical recession. According to this indicator, South Korea joined Japan, Thailand and Singapore - all of these countries suffered not only from internal restrictions during the pandemic, but also from a drop in external demand.

The South Korean economy is almost 40% dependent on exports and this sector recorded the strongest decline - by 16.6% compared to the first quarter. For comparison, consumption in the country increased by 1.4%, capital investments fell by only 2.9%, industrial output fell by 9%, in the service sector - by only 1.1%. South Korea was one of the first to impose strict restrictions, including on entry from abroad and tracing those infected, which made it possible to maintain a low number of cases - only 14 thousand since the beginning of the pandemic.

The Finance Ministry expects the country to recover growth in the next quarter, according to the Chinese scenario. This should be facilitated by the improvement of the situation abroad. Earlier, the government of the country announced a plan to support the economy by $ 231 billion. Nevertheless, on average in 2020, analysts predict the first decline in the country's GDP since the Asian crisis - by 0.4%. The IMF expects a reduction of 2.1%. Capital Economics indicates that domestic consumption in the country will grow (although the threat of repeated outbreaks of COVID-19 remains), but the slow recovery in external demand will hamper the rapid growth of exports.