South Korea’s Economy Shrinks the Most Since 2008

(C) Reuters. South Korea’s Economy Shrinks the Most Since 2008

(Bloomberg) — South Korea’s economy suffered its worst contraction since the global financial crisis in the first quarter as the spread of the coronavirus hit consumer spending and business activity.

Gross domestic product shrank 1.4% in the three month through March from the prior quarter, the Bank of Korea said in a statement. Economists forecast a 1.5% contraction.

Key Insights

• South Korea was one of the first countries hit by the outbreak, with the world’s second-highest caseload in February. It has since managed to flatten the infection curve without forcing shutdowns.
• Still, lockdowns around the world are likely to hit the trade-dependent economy even as the contagion slows at home. South Korea’s exports plunged 27% in the first 20 days of April, fueling concern the country’s core growth engine will sputter.
• Pent-up consumer spending and government stimulus in coming months could help offset trade headwinds. South Korea is considering relaxing its social distancing rules and reopening schools in May.
• President Moon Jae-in said Wednesday he’s ordering up a third emergency budget and called for a “Korean-style New Deal” to create jobs longer-term. So far, the government has pledged at least 245 trillion won ($199 billion) in spending and loans to shore up the economy.
• Bank of Korea Governor Lee Ju-yeol said the economy would still eke out growth this year, but probably less than 1%. The central bank is set to update its economic projections at its next scheduled meeting on May 28.

What Bloomberg’s Economist Says

“Our baseline forecast is for the economy to eke out a 0.3% expansion in 2020, assuming continued fiscal and monetary stimulus and a gradual recovery from 2H. Even so, risks are tilted firmly downward.”

–Justin Jimenez, Bloomberg Economics

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• Private spending fell 6.4% last quarter compared with the prior three months, the most since the 1998 Asian financial crisis.
• Government spending increased 0.9%, facilities investment rose 0.2% and construction investment gained 1.3%.
• Exports fell 2% when adjusted for price changes, the report showed, while imports slid 4.1%.
• From a year earlier, the economy expanded 1.3%.

(Adds sector breakdown.)

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