Korea could suffer greater shock from COVIC-19
The country's industrial output edged up slightly by 0.1 percent in July from a month earlier, according to Statistics Korea. The figure appears to be not that bad, given the crippling impact of the COVID-19 pandemic. But looking at domestic consumption, we cannot help but be pessimistic about the overall economic outlook.
Retail sales nosedived 6 percent, raising concerns that Asia's fourth-largest economy could plunge into a vicious cycle of falling consumption leading to lower production and hence a deeper recession. If such a cycle becomes reality, Korea cannot avoid a more painful predicament than the 1997-98 Asian financial crisis.
The plunge came after the government provided relief funds totaling 14.3 trillion won ($12 billion) to all households in May to help minimize the economic fallout from the coronavirus. Consumers used up the emergency aid in May and June, making its consumption-boosting effect disappear in July.
More seriously, the resurgence of the pandemic will aggravate the economic situation even further. The country raised social distancing rules by one notch to Level 2 under the three-tier system Aug. 16 to cope with a spike in coronavirus cases. On Aug. 30, health authorities further strengthened the rules because new daily infections have remained in triple-digit figures for more than two weeks.
It is urgent to make every effort to contain the rapid spread of the coronavirus. The country cannot turn the economy around without bringing the pandemic under control. At the same time, the Moon Jae-in administration must come up with another economic stimulus package, after the previous ones totaling 270 trillion won. The government also needs to offer a second round of relief funds to households and draw up an additional extra budget.
Such measures will require an astronomical amount of taxpayers' money. Some critics are against those measures, fearing that they will ramp up the national debt, cause a snowballing budget deficit and damage fiscal soundness. However, fiscal expansion is badly needed to prevent a potential economic meltdown amid the relentless pandemic.
The country has already begun to experience a pandemic-driven recession. The export-reliant economy contracted 3.2 percent in the second quarter of the year after shrinking 1.3 percent in the first quarter. Exports fell 9.9 percent last month, continuing a six-month downward march.
Last Thursday, the Bank of Korea revised down its 2020 economic outlook to a 1.3 percent contraction from its May projection of a 0.2 percent shrinkage. The central bank even warned that the economy could contract by 2.2 percent if the public health crisis rages through the winter.
The liberal government should work out a contingency plan to prepare for a worst-case scenario. It must mobilize all possible means to defeat COVID-19 and put the economy back on track. It is imperative to strengthen the social safety net to deal with mass layoffs down the road. More relief money should be extended to protect the most vulnerable, including small businesses, the self-employed and the poor.