“Last week, the cafe I work for suffered from decreased sales, and not many pedestrians were seen on the street nearby,” said Han Su-bin, a worker at a cafe in a trendy street in Yongin City, about 20 km south of Seoul. “But now, sales have recovered.”
Han added, “As a young person with relatively strong immunity, I’m hardly afraid of the new coronavirus: I heard that the virus had a low fatality rate. But, I am worried about my parents and grandparents because their immunity is weaker.”
That is a well-informed opinion. After all, Korea, which has registered 24 cases, has yet to suffer a fatality from the virus and has seen two patients recover.
However, in a nation that is acutely sensitive to health scares, the coronavirus is hammering various sectors of the economy.
The impact spreads
“We have about 30% fewer customers than before the outbreak of the coronavirus,” said a waitress at a traditional restaurant in Seoul. “I think we are hit harder because this restaurant is frequented by older customers and many older people cancel their reservations due to worries of infection.”
An official of the Korea Food Service Industry Association told Asia Times, “We are hearing our members being damaged by a coronavirus, and we are examining how serious the damage is.”
Consumer businesses such as department stores, discount stores, amusement parks, hotels, movie theaters and duty-free shops are being impacted. Retail chain Lotte announced today that it is temporarily closing a downtown department store where a case of the virus had been reported for disinfection. And overall, the use of credit cards is decreasing.
“We are monitoring consumption-related early indicators on a daily basis,” a Ministry of Finance official told Asia Times. “Concerns over the spread of the new coronavirus are negatively affecting consumption.”
However, he declined to disclose information on how seriously conditions are worsening.
The impact is being felt beyond B2B businesses.
With China-Korea supply chains being closely interlinked, car makers have been forced to halt operations. Hyundai Motor, Renault Samsung and Ssangyong Motor have all temporarily shut down production lines due to supply disruptions in Chinese parts – the result of Beijing extending its national Lunar New Year holiday.
But there are some winners. Stocks of mask makers and hand sanitizers have risen, while online shopping and food delivery apps are seeing usage increases.
“From Jauary.31 to February 4, the number of delivery orders rose 8% from a month ago. On February 1 and 2, which were holidays, the use of the delivery app increased 14.5% and 11.8%, respectively,” an official of Woowa Bros, which runs a food delivery app, told Asia Times. “Although the use of delivery apps was already on the rise, it seems to be true that the new coronavirus accelerates this trend.”
Still, Woowa Bros are not popping the champagne just yet: The staffer pointed out that the rise of use in the delivery app was not huge in the virus period; deliveries increase 10-15% even when weather is bad, he said.
Macro jitters: global
With the virus not yet showing any signs of peaking, its impact on global growth is difficult to predict, but that has not stopped Goldman Sachs from trying
The investment bank wrote in report published on February 3: “The coronavirus outbreak does not change our baseline view that underlying global growth has bottomed out and the next leg is likely to be higher, driven by a reduced drag from the trade war and the past easing in financial conditions.”
However, Goldman made clear that short-term economic damage is inevitable.
“The coronavirus outbreak is set to reduce Chinese GDP growth in the first quarter of 2020 by 1.6%p in year-over-year terms, or 6.4%p quarter-on-quarter annual rate terms,” the report stated. “The assumed hit to Chinese growth directly subtracts about 1%p (quarter on quarter) from global GDP growth in Q1. In addition, we estimate that spillover effects to the rest of the world will take just under 1%p (qoq) off global growth, for a total hit of nearly 2%p. The spillover effects consist of reduced exports to China (worth about 0.3%p) and reduced spending by Chinese tourists abroad (worth about 0.6%p).”
According to Goldman Sachs, if the aggressive measures from the authorities in China and elsewhere sharply lower the rate of new infections by the end of the first quarter, the global economy will normalize from the second quarter with growth rebounding to about 1.5% in the second quarter and 0.5% in the third quarter.
Under this scenario, the coronavirus outbreak is forecast to reduce the global economy by 0.1-0.2% this year. Even so, growth for the year will still come in at 3.25% – higher than the estimated 3.1% of 2019.
But if the rate of new infections peaks in the second quarter, global growth will be lowered by 0.3%, Goldman said.
Macro jitters: local
There are rising concerns over the impact of the coronavirus on South Korea. The service sector, including lodging, wholesale, and retail sectors, is suffering the first wave of damage, as is the automobile industry, in temporary shutdown.
However, with the virus showing no signs of abating, and with the situation still being at an early stage it is difficult to determine the extent of the downside risk.
“The economic growth rate will be lower than expected, but it will be higher than last year’s. The key is how much growth we lose,” a Finance Ministry official said. “Considering the past case – SARS – the Korean economy could witness a V-shaped recovery after the coronavirus subsides.”
Along with shrinking domestic consumption, weaker global and Chinese economic growth will weigh upon the trade-dependent Korean economy.
“If the rate of infection is lowered significantly in this month, it will hardly have a negative impact on the economy as worsening indicators are expected to rebound immediately after things get better,” Lee Sang-jae, an economist at Eugene Investment and Securities, told Asia Times. “On the other hand, if the infection spreads after the first quarter, as in the case of the SARS outbreak in 2003, the annual growth rate will be lower than expected.”
Seoul is already reacting with a raft of economic measures.
It has come up with 400 billion won ($335 million) in trade finance for exporters. It has also earmarked 2 trillion won in a policy finance package for small and medium-sized enterprises and self-employed business which are suffering from the disease.
In a further measure, small businesses such as hotels and restaurants will be able to delay paying tax by up to nine months.
But the impact of the outbreak does not stop in the health and economic spheres: It is also casting its shadow over April’s National Assembly elections.
“If the disastrous situation is prolonged, it will be disadvantageous to the ruling party,” a ruling party lawmaker told Asia Times. “On the other hand, if preventive measures by the government work to curb the spread of infection, and the worst subsides soon, things will be in favor of the ruling party.”