South Korea's economic outlook for the year is bright and shiny. Photo: Tom Coyner

In any normal year, a 0.8% on-year economic contraction would have horrified Koreans, but in this year of years, it might be considered a shining triumph – for the modest figure puts it at the top of the OECD when it comes to annual GDP.

The OECD anticipated 3.1% growth for Korea 2021, on condition there is no resurgence of the pandemic. The organization warned, however, that a second global wave would see the economy contract by 2% in 2020, and grow only 1.4% in 2021

The results appeared in the just published OECD Economic Survey of Korea.  

Damage limitation

Under harsh IMF tutelage amid the Asian Financial Crisis, South Korea built a highly recession-proof economy and has not seen a year of negative growth since 1998; this year will be the first.

But it will still be a top performer in the “rich nation’s club.” Previously, in June, the OECD had anticipated that Korea would have the highest growth rate among OECD members for 2020 (albeit negative); overall, the OECD anticipates a 6% fall in annual growth in 2020.

The OECD noted that the Korean economy depends heavily on exports and is deeply integrated into global value chains. The organization expects exports to be down 5.7% this year and up 4.4% next year, unless there is a second pandemic wave – in which case this year’s exports fall to -7.6% and next year’s to and -0.7%

Yet domestically, mobility for restaurants and retail is higher than for other OECD nations, largely as a result of having  managed the virus without any lockdowns.

 “Korea has limited the damage to its economy from the Covid-19 crisis with swift and effective measures to contain the virus and protect households and businesses,” the “rich nations club” said in a statement.

With the South Korean less heavily indebted than many OECD countries, “Sound public finances mean there is room for fiscal stimulus,” the organization noted. It suggested “focusing investment in some of the areas featuring in the recent Korean New Deal, such as 5G telecommunication and artificial intelligence.”

The “Korean New Deal” is the multi-pronged economic recovery package the government has outlined to beat the Covid-19 crisis. So far, the government has passed four supplementary budgets.  

It appears to be working. Private consumption is expected to drop just 3.6% on-year in 2020, and total investment is predicted to rise 2.9%. Employment in June fell just 1% compared to 10 times that number in Canada and the United States.

Even so, local financial risks are rising, despite policy interventions, as unemployment and loss of income affect debt reimbursement by households and small businesses, the OECD warned.

And one expert was cautious about the data.

“It is extremely good – better than any recent forecast,” said Tony Michell, a professor at Korea Development Institute School. It also looks upbeat compared to H1: South Korea GDP shrank 3.3% quarter-on-quarter in the second quarter of 2020, following a 1.3% decline in the first quarter. To bring annual GDP in at 0.8% the country would need to have a “superb” second half, Michell said, adding, “I don’t see that now.”

Winners and losers

Indeed, several key Korean sectors are positive. In addition to travel and tourism, the OECD report cited cars and petrochemicals as two areas that have come under serious pressure due to Covid.

However, there are some positive stories. National flagship Samsung Electronics, has, like major US blue-chip tech players, outperformed during the crisis. While the latter have enjoyed soaring demand for digital services during lockdown, Samsung has been providing the memory chips they required to meet the new demand.  

Michell suggested that electrical appliances could see an H2 uptick and noted that South Korean online services are also likely winners – as long as they have a revenue model. “In theory, anything digital that is not reliant on ad revenue will do extremely well,” he said.