By Randall S. Jones

After two quarters of large declines, real GDP increased 7.9% at a seasonally-adjusted annual rate (saar) in 2020Q3, according to the advance estimate released on October 27 by the Bank of Korea (table below). The rebound, Korea’s strongest quarterly growth rate since 2010, reflects its effective response to the coronavirus pandemic. The government’s approach of mass testing and contract tracing has helped Korea avoid the economy-wide lockdowns that hindered economic activity in many countries. In addition, a strong fiscal and monetary policy response, including four supplementary budgets amounting to 66.8 trillion won (3.7% of GDP), supported domestic demand.

Real GDP in 2020Q3 was 2.5% below its peak in 2019Q4 (figure below). The rebound in the third quarter of 2020 recovered about two-fifths of the drop in output between the peak in 2019Q4 and the trough in 2020Q2.

Hong Nam-ki, Minister of Economy and Finance, said that Korea has entered a recovery phase primarily thanks to the growth in exports to major economies, notably China, reflecting stronger demand for Korean tech products and cars. Exports surged 78.4% in the July-September quarter, the highest growth rate since 1986. Import growth was slower at 21.3%, as domestic demand declined in 2020Q3.

The fall in private consumption (-0.5%) was due in part to a tightening of social distancing measures following a resurgence of COVID-19 from mid-August. The Bank of Korea estimated that such measures may have slowed real GDP growth by as much as 2% (saar). In addition, typhoons and an exceptionally long rainy season had an adverse impact on private consumption. Gross fixed capital formation fell 7.3%, as a large decline in construction more than offset an increase in facility investment.

The economic outlook

Korea appears on track to achieve the projection made by the OECD in September of a 1.0% decline in real GDP in 2020. Such an outcome would be among the best in the world, as world real GDP is projected to contract by 4.5% this year. Private consumption will be supported by the easing of the social distancing scheme to its lowest level on October 12. The number of new COVID-19 cases has remained around 100 per day since then and consumer sentiment rebounded strongly in October.

Fiscal policy will also continue to provide support through the fourth supplementary budget and the 2021 budget. The budget submitted to the National Assembly in September would increase government spending by 8.5% in 2021. In his October 27 speech to the National Assembly, President Moon said that “It’s time to operate full-scale measures to invigorate our economy to put it on a normal track starting next year”, emphasizing the importance of maintaining and creating jobs. While the president stressed the need for expansionary fiscal policies, he also mentioned the need to maintain long-term fiscal soundness.

In sum, Korea appears on track to achieve its pre-pandemic level of economic activity by mid-2021. However, there are international and domestic risks to a strong recovery. The U.S. jobs report in September suggested a slowdown in the U.S. recovery despite the record-high GDP growth rate of 33.1% (saar). A second wave of the coronavirus in Europe is leading to a new round of lockdowns, which may also reduce global demand for Korean products. Export and import values in October decreased 3.6% and 5.8%, respectively, from a year ago in part due to fewer working days. On the domestic side, Korea also faces the risk of a second wave of the virus, which could weaken private consumption.

It is important that the recovery lift Korea’s economy to a higher growth path compared to the sluggish economic performance in 2019, when real GDP growth was only 2.0%. Boosting economic growth requires that Korea shift from its traditional model based on large companies and exports to a more balanced approach that promotes inclusive growth through reforms to raise productivity in both the large business groups and SMEs. To mitigate the impact of rapid aging, Korea needs labor market reforms to raise the employment of women, youth and older persons and to break down labor market dualism to enhance well-being and social inclusion. Addressing environmental problems and promoting green growth is also essential to improve health and well-being, as well as to ensure the sustainability of growth. The government’s New Deal projects should help Korea achieve these objectives.

Randall S. Jones is a Visiting Fellow at Columbia University and a Non-Resident Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Park Keun-Hyung’s photostream on flickr Creative Commons. Graphics by Juni Kim, Senior Manger for Operations and Technology, Korea Economic Institute of America.