South Korea’s economy is entering what seems to be shaping up to be a perfect storm, driven by rising fears over the rapid spread of a novel coronavirus.
The crippling effects of the epidemic, which originated in China in December, is further weighing on the country’s economy, which has already lost its vitality largely due to ill-conceived policies pursued by the Moon Jae-in administration.
Consumer spending has dwindled dramatically while industrial output is being disrupted.
Outbound shipments from Asia’s fourth-largest economy are expected to decrease on-year for the 15th consecutive month in February.
On top of the simultaneous slump in consumption, production and exports, the country is facing growing instability in the capital market. Local stock prices have been plummeting, with the Korean won sharply losing its value against the US dollar.
International investment banks forecast Korea’s economy will record negative growth in the first quarter of this year and its 2020 annual growth rate will tumble below 1 percent.
The Bank of Korea earlier this year estimated the economy would expand 2.3 percent on-year in 2020, slightly rebounding from the 2 percent growth of last year, the slowest pace in a decade. The central bank is likely to revise down its growth estimate when it offers its latest outlook for the country’s economy Thursday.
President Moon’s calls for a dual fight against the coronavirus outbreak and its economic impact have proved insensible. As recently as Friday, he emphasized the need for a two-track approach to contain the spread of the epidemic while minimizing the negative effects of quarantine measures on the economy.
Since then, there has been a surge in the number of confirmed cases of the highly infectious disease that has further dampened economic activity. On Wednesday, Korea reported 284 new cases, bringing the total number of infections here to 1,261, including 12 deaths. The country now has the largest number of cases outside China.
Moon should have put top priority on ensuring quarantine effectiveness without being bounded by economic concerns.
His government has turned a deaf ear to calls from some health experts for an entry ban on visitors from all parts of China partly because of the economic impact of the move. But the stance may have fueled the spread of the deadly virus here, blanketing economic activity across all sectors.
The government plans to come up with a set of measures to cope with the fallout from the virus outbreak. It is also drawing up a supplementary budget to help fund such efforts.
The Moon administration should go beyond resorting to more fiscal spending to cope with the economic impact of the spreading epidemic.
It should send a clear signal that it will abandon its misguided policies that had dampened corporate activity and market vitality before the virus outbreak.
A recent survey of about 1,000 adult Koreans showed nearly 60 percent of respondents thought negatively of the income-led growth policy pursued by the Moon administration since it took office in 2017. The ill-conceived policy, backed by a string of pro-labor measures, including steep minimum wage hikes and a shortened workweek, has increased the suffering of low-income workers in particular, as companies have reduced investment and employment to cope with rising costs.
It is necessary to expand financial support for daily workers, self-employed people and small business owners, who have borne the brunt of the economic impact of the virus crisis.
But any further fiscal expansion unaccompanied by measures to strengthen the fundamentals of the economy will end up as a temporary painkiller.
The Moon government should no longer hesitate to carry out sweeping deregulation and labor reforms to encourage corporate investment in the long term.
It is also necessary to cut tax rates in addition to offering more tax breaks. In 2018, the Moon government raised the maximum corporate tax rate from 22 percent to 25 percent, going against the global competition to forge better business conditions. Despite the move, corporate tax revenue fell far short of the government-set target last year.
All efforts should now be focused on containing the spread of the novel coronavirus even at the cost of drawing back the economy in the near term. Economic policymakers should fix their sights on how to pull the economy out of the downward trend beyond the crisis caused by the virus.