South Korea faces Q1 economic contraction due to coronavirus

Bank of Korea Governor Lee Ju-yeol said Thursday that the South Korean economy could contract in the first quarter because of the escalating spread of the new coronavirus.

His stark warning came after the central bank surprised markets by keeping its key interest rate at 1.25%. The BOK said a rate cut will only come after it calculates the impact of the virus carefully.

"I see a possibility of negative growth as most of the shocks [from the virus] will be absorbed in the first quarter," Lee said in a news conference held via the bank's YouTube channel due to the outbreak. "Consumption has been squeezed. The tourism and restaurant industries have been hit directly."

As many as 1,595 people in South Korea have been confirmed to have the virus, with 13 deaths, as of Thursday morning. More than 80% of the cases occurred in Daegu -- the country's fourth-largest city, with a population of 2.5 million -- and its surrounding North Gyeongsang Province. Many of these cases originated at a religious cult in the city.

Asia's fourth-largest economy had already been struggling before the outbreak, expanding just 2% last year -- its slowest growth rate since the financial crisis.

The coronavirus is hitting both private consumption and industry. Business sentiment for March declined at its fastest pace in nearly 17 years, according to a BOK survey published on Wednesday.

"A drop in consumption could add to the headwinds already facing the economy," said Alex Homes, Asia economist at Capital Economics.

The government is also turning on the fiscal spigot to cushion the blow from the virus. The Finance Ministry is preparing an extra budget that analysts forecast will be worth around $10 billion, or around 2% of the annual budget for 2020.

"South Korea now faces a new threat with regard to its domestic demand because of an unexpected spike in COVID-19 cases locally," said Lloyd Chan, an economist at Oxford Economics. "This implies a growing downside risk to our GDP growth forecast -- currently at 1.8%" for 2020.

Separately, U.S. Forces Korea announced Thursday that it will cancel joint drills with South Korea this year until further notice due to the coronavirus. USFK said the previous day that a soldier stationed at Camp Carroll -- near Daegu -- tested positive for COVID-19, marking the first time a U.S. service member had tested positive for the virus.

Source: Nikkei Asian Review