Worst has yet to come

New policies needed to ride out economic crisis

South Korea suffered its worst economic performance in 11 years, battered by the coronavirus pandemic. More seriously, the worst is yet to come. The country is expected to feel a more severe economic impact in the coming months, so it is urgent to take bolder action to avoid a worst-case scenario.

The economy contracted 1.4 percent in the first three months of this year from the previous quarter, according to the Bank of Korea. This figure represents the steepest quarterly contraction since the fourth quarter of 2008 when the economy shrank 3.3 percent amid the global financial crisis.

Given the severity of the economic fallout from COVID-19, the contraction is not surprising. Private consumption nosedived 6.4 percent in the first quarter, leading the economic shrinkage. The decline was the sharpest since the first quarter of 1998 following the Asian financial turmoil. The figure indicates that people cut back on consumption by a big margin in the face of the health crisis.

Exports, the country's growth engine, dropped 2 percent on a quarter-on-quarter basis. This figure is not so bad, compared with domestic consumption. But overseas shipments are predicted to fall further in the second quarter when economic damage from the pandemic becomes more intense.

Last week, the International Monetary Fund predicted the Korean economy would contract 1.2 percent this year with the global economy shrinking 3 percent. Yet no one can be sure that the country's economy will outperform the world's average. There are concerns that our export-oriented economy might be harder hit by the COVID-19 catastrophe than any other economies.

For this reason, the Moon Jae-in administration has committed to providing 240 trillion won ($194 billion) in economic relief packages to help businesses, stabilize financial markets, create jobs and boost people's livelihoods. However, it is uncertain if the fiscal stimulus is big enough to prevent the looming economic woes. Some critics argue that the support packages could risk wasting taxpayers' money and hurt the country's fiscal health creating a huge budget deficit.

We believe the astronomical sum of relief money is crucial for riding out the ongoing economic calamity, which is seen as the worst since the Great Depression of the 1930s. But we have to point out that “helicopter money” is not a magic solution. The country cannot print money with no-holds barred as seen in the U.S. and other advanced economies.

Therefore, the Moon government should map out detailed action plans to maximize the effects of the relief packages. It also needs to ensure that financial support is funneled into hard-hit key industries such as airlines, shipbuilding, auto manufacturing and petrochemicals. The administration must also be careful not to pour money into a bottomless pit.

In addition, the government needs to change its rigid “income-led” growth policy, which has failed to generate jobs and bring about higher wages. It ought to produce more market-friendly policies to promote deregulation and innovation. At the same time structural economic and labor market reform is imperative to revive Corporate Korea and shore up the economy.