Korea: economic impact of coronavirus to worsen - Capital Economics
Emerging Asia Economics

Korea: economic impact of coronavirus to worsen

Emerging Asia Economics Update
Written by Alex Holmes
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With the number of confirmed coronavirus cases in Korea jumping sharply over the past few days, the Bank of Korea is almost certain to cut interest rates at its meeting next week.

  • With the number of confirmed coronavirus cases in Korea jumping sharply over the past few days, the Bank of Korea is almost certain to cut interest rates at its meeting next week.
  • The number of confirmed cases of the coronavirus in Korea doubled on Thursday to 104. (See Chart 1.) Korea now has more cases than any country outside of China (although the second biggest cluster of cases is the Diamond Princess cruise ship with 621 cases). The infections in Korea are mostly in the city of Daegu. Authorities have warned that numbers are likely to rise in the coming days.
  • Residents of the city have been asked to stay indoors and it is likely that people across the rest of Korea will also exercise more caution by avoiding public spaces such as restaurants, shops and concerts.
  • This is likely to weigh on private consumption, which accounts for around 50% of GDP. Other countries’ experience of SARS in 2003 offers an example of how things could play out. (Korea itself was relatively untouched by SARS, with just three cases.) Hong Kong, Singapore and Taiwan, which all experienced a large number of infections, saw consumption contract sharply in the second quarter of 2003, followed by a strong rebound as the outbreak was brought under control. (See Chart 2.)
  • A drop in consumption could add to the headwinds already facing the economy. The tourism industry has been hit hard by a drop in arrivals from China. While the sector is not as important to the economy as in other parts of the Asia, a 50% drop in total tourist arrivals would knock around 1% off GDP.
  • Korea’s industrial sector is also being hit hard. Factory shutdowns in China have led to a slump in demand for Korean industrial goods and are also causing problems for Korean companies which rely on Chinese-made components.
  • Hyundai Motors had to partially halt production again on Tuesday due to a shortage of parts, only five days after it resumed operations following an earlier production outage. Korea’s large electronics sector also looks particularly exposed. (See our Update, “How big will the disruption be to Asian supply chains”, 13th February.) A large drop in imports from China in the first 10 days of February provided the first hard evidence of the disruption the slowdown in China is causing Korea. (See here.) Trade data for the first 20 days of February, which will be released tomorrow, should provide further evidence of this trend.
  • Previously, we had expected the coronavirus to primarily affect Korea via its links with China’s economy. But the jump in cases in Korea means that the economic impact is now likely to be felt much more broadly. We recently lowered our GDP growth forecast for 2020 from 2.5% to 1.0%. The risks to our forecast are now skewed to the downside.
  • It looks almost certain that the Bank of Korea will cut its main policy rate by another 25bps next Thursday, to 1.00%. And with monetary policy approaching the limits of what it can do to support growth, fiscal support will also need to be stepped up. President Moon hinted at this on Tuesday when he expressed the “need to take emergency steps”. We expect a stimulus package to be announced soon.

Chart 1: Korea Total Coronavirus Cases

Chart 2: Private Consumption (% q/q)

Sources: World Health Organisation, Yonhap News

Sources: Refinitiv, Capital Economics


Alex Holmes, Asia Economist, +65 6595 1515, alex.holmes@capitaleconomics.com