Ready for Recovery?

The main reason for this resilience is the successful campaign South Korea has waged against COVID-19. After an initial outbreak in late February, daily infections have never surpassed 500 since, with a mortality rate much lower than the global average. The country has achieved this through a combination of mass testing, contact tracing, targeted quarantine and a three-tier social distancing system. Crucially, South Korea's virus-control measures have been less strict than those imposed in many other countries where nationwide lockdowns brought economic and social life to a halt. To alleviate the disruptions of the epidemic and ensuing virus-control measures, the government has made strident fiscal stimulus measures and has so far implemented three supplementary budgets worth a total of W59trn (USD 48.5bn) in 2020. The extra public expenditure has been committed to boosting employment, improving social welfare provisions, as well as keeping small and medium sized enterprises afloat. This fiscal stimulus has been effective in sustaining household income and employment levels, hence it is not a coincidence that private consumption (-3.2%) is forecasted to shrink less than in any other OECD country in 2020. The strength of the economy is evidenced in the impressive recovery in retail sales, which have been on year-on-year growth since May. In most countries the retail industry has been one of the hardest hit during the pandemic, given that it predominantly relies on face-to-face customer engagement and onsite spending. As seen from Chart 2, the share of e-commerce in other developed Asian economies such as Japan and Singapore has not risen higher than 7% pre-COVID. However, South Korea has been one of the exceptions here with the share of online consumption steadily increasing in recent years from 16.6% in 2017 to almost 27% by mid-2020. This created the solid base for continuous growth even when a significant number of customers were not willing to go outside and buy products at physical stores.

Merchandise exports have also bottomed out since April. Partially that is due to the rising demand in China that itself has seen positive economic growth in Q2 2020. On the other hand, many South Korean exports, particularly computer products and health equipment, have been in high demand during the pandemic. However, with the recent resurgence of domestic infections, there are risks to the exports recovery as stricter social distancing measures may hamper the normalization of productions, and year-on-year the exports are still in decline.

What’s the Deal with the Korean New Deal?

Coronavirus aside, the ‘Korean New Deal’ recently outlined by President Moon will be the most important effort for long-term economic growth of the country. By investing W160trn (USD 133bn) over 2020-25 in digital technologies, green economy and job security improvement, the government plans to create 1.9m jobs by 2025. The spending on each part of the plan is outlined in Chart 3 to 5.

South Korea is on track to record the most resilient economic performance in 2020 among OECD countries (Chart 1). None of the developed economies will grow this year owing to the economic fallout caused by the coronavirus (COVID-19) pandemic, but South Korea’s GDP is set to contract the least at -1.8%. Judging by the current circumstances, it is most likely to be the first to recover to pre-COVID level, which The Economist Intelligence Unit (EIU) expects to happen in 2021, at least one year ahead of most other major economies.