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South Korea's Coronavirus Formula: Heavy on Stimulus, Light on Lockdowns

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06/04/2020 | 09:30am EDT

By Andrew Jeong

SEOUL--South Korea's economy has proved to be one of the most resilient in the world in the face of the coronavirus.

But economists say that will be difficult to sustain. Dependent on exports--led by the likes of Samsung Electronics Co., Hyundai Motor Co.and LG Corp.--the economy is feeling the pain of the global spending slowdown triggered by the pandemic. South Korea's exports in May were down 24% from a year earlier, about matching April's 25% drop.

And while countries around the world may be relaxing lockdowns that have kept people indoors, decimated incomes and the lingering virus make a flurry of consumer purchases seem unlikely: "Even if we are lucky enough to avoid a second wave, people will be slow to return to their old habits," said Gene Grossman, an economics professor at Princeton University.

"It is unlikely that any economy will experience a full, rapid V-shaped recovery from the pandemic," said Rajiv Biswas, chief Asia economist for IHS Markit, a market researcher.

Though South Korea was one of the first countries hit by the coronavirus, its economy actually grew in the first quarter, a rare accomplishment. The question is whether the government's aggressive support and a pandemic strategy that has avoided widespread lockdowns will be enough to keep it afloat.

Stimulus spending has added up to more than 12% of gross domestic product--on par with packages in the U.S. and Europe. The government also stoked growth by accelerating spending from the regular budget when infections spiked in mid-February. And this week it said it would inject another $28 billion into the economy through the country's largest-ever single supplementary budget.

But last month, in the first revision to its outlook since February, the central bank forecast the economy will contract 0.2% this year-- compared with the prior forecast of 2.1% growth. It slashed interest rates by a quarter of a percentage point to 0.5%, a record low. A new cluster of virus cases across greater Seoul--at nightclubs, logistic centers and churches--has sparked discussion of whether social-distancing measures relaxed last month should return.

South Korea, nonetheless, shows how to keep an economy active even during the dark days combating a major virus outbreak. Employing broad testing and aggressive contact tracing rather than lockdowns means the country's 51 million people have been able to leave their homes, with restaurants, bars and retailers largely open, limiting the drop in consumer spending. The unemployment rate is 4.2% and has hardly budged.

Asia's fourth-largest economy reported annual growth of 1.4% during the first three months of the year, while the European Union was shrinking 2.6% and China 6.8%. The U.S.'s year-over-year growth was the worst in more than a decade, 0.2%.

Among members of the Organization for Economic Cooperation and Development--mostly developed countries--only Hungary, Lithuania, Poland, and Turkey topped South Korea's economic performance, and none of them reported a Covid-19 case before the very end of February.

"South Korea successfully contained the pandemic, helping it avoid a lockdown, which resulted in preventing the growth rate from worsening," said Sung Tae-yoon, an economics professor at Yonsei University in Seoul.

It got an unexpected boost from a surge in world-wide internet use as health officials told people to stay home. That drove demand for memory chips, South Korea's top export--its companies represent about 60% of the global market--contributing 0.7 percentage point to first-quarter GDP growth.

Back home, even as the nation grappled for weeks in February with the second-biggest outbreak in the world at the time, two factors helped keep the economy running.

One, local officials and economists say, was accelerated spending from the 2020 fiscal budget: The country burned through about 35% of the budget in the first three months of the year--the fastest rate in at least a decade, government officials said. First-quarter allocations for developing semiconductor chemicals and loans to startups and small businesses were doubled, boosting spending by around $785 million. The labor ministry pumped 50% more than planned into job-creation subsidies.

The unemployment rate has barely moved since January, as larger employers have used furloughs or pay reductions to avoid job cuts. A contraction in the labor force--the largest since the Asian Financial Crisis of the late 1990s--also played a role. The agriculture and health sectors did add jobs.

The country also never resorted to lockdowns. Social-distancing measures, which didn't require retailers and restaurants to shut down, remained in place until last month.

Restaurant activity in the first three months of the year--the latest government figures available--was down about 10% from a year earlier. That is less than half of the U.S. decline in recent weeks, according to NPD Group Inc., a market research firm.

Though South Korean consumer confidence hit decade lows, household spending's 6% slide in the first three months of the year was smaller than the historic U.S. decline of 7.5% in March, as states began issuing stay-at-home orders.

Seeing tougher months ahead, the government of South Korean President Moon Jae-in is keeping up stimulus in the form of loans, tax breaks, benefits and cash dole-outs: The spending comes to about $200 billion, or 12% of GDP, before counting the newly proposed $28 billion.

"The bottom of the global economy is not in sight," Mr. Moon said last week to members of his cabinet.

Mr. Moon has pushed for additional government spending on services that minimize physical contact, in the wake of the pandemic, including artificial intelligence. He has also pledged more assistance to the travel industry, one of the worst-hit sectors, conditioned on companies' maintaining more than 90% of their workforce for at least six months.

Another part of Mr. Moon's response includes government plans to hire 1.6 million people, though critics note many of these positions are low-paying positions that last five to six months.

The stimulus appears to have dispersed some of the economic fallout from the pandemic so far, with hotel and restaurant trade groups in Seoul reporting revenue bottoming out and even improving slightly in recent weeks.

Mr. Sung, the Seoul-based economist, said more government spending in the months ahead would prop up key indicators such as consumption and employment. But a big portion, he said, is one-time cash transfers that won't boost the economy longer-term.

"The money would be better spent if it were used as investments, in the form of more scholarships to educate the workforce, or lower taxes to entice firms to invest," he said.

Write to Andrew Jeong at andrew.jeong@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
AT HOME GROUP INC. 3.68% 6.635 Delayed Quote.16.18%
HYUNDAI CORPORATION 1.88% 13550 End-of-day quote.-24.30%
HYUNDAI MOTOR COMPANY 0.81% 99000 End-of-day quote.-17.84%
IHS MARKIT LTD. -0.18% 75.73 Delayed Quote.0.65%
JUST GROUP PLC 0.10% 51.2 Delayed Quote.-35.25%
LG CORP. 1.12% 72200 End-of-day quote.-2.17%
LINE CORPORATION 0.92% 5470 End-of-day quote.2.24%
MEMBERS CO., LTD. -4.13% 1394 End-of-day quote.-38.78%
SAMSUNG ELECTRONICS CO., LTD. 0.57% 52900 End-of-day quote.-5.20%
THE GLOBAL LTD. -0.96% 207 End-of-day quote.-56.05%
US DOLLAR / TURKISH LIRA (USD/TRY) 0.13% 6.85298 Delayed Quote.15.21%
WILL GROUP, INC. -4.08% 634 End-of-day quote.-49.36%
WORLD CO., LTD. -2.20% 1514 End-of-day quote.-43.74%
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