Economy Could Shrink 1.6%, Think Tank Warns

  • By Hong Jun-ki

    May 21, 2020 11:43

    The state-run Korea Development Institute on Wednesday predicted that Korea's economy will grow only 0.2 percent this year due to the coronavirus epidemic.

    That is 2.1 percentage points lower than its previous forecast last November, and the KDI warned that the economy could shrink 1.6 percent if there is a severe second wave of mass infections.

    The think tank also projected growth next year at around 3.9 percent.

    The KDI offered three different scenarios, with 0.2 percent only likely if the epidemic starts to ease in Korea in the first half of this year and around the world in the second half.

    But it warned that if infections start to increase again both here and abroad, it could shrink 1.6 percent. But if infections fade quickly and economic activity in Korea starts to pick up in May and around the world in the third quarter, Korea's GDP could even grow 1.1 percent this year.

    The KDI called for "active monetary and fiscal policies... to minimize the negative impact of the coronavirus crisis." It added that "recovery will be slow" even if the epidemic ends because corporate and household bankruptcies and unemployment are increasing.

    It urged the Bank of Korea to lose no time in slashing the base interest rate close to zero percent from the current 0.75 percent, and actively buying sovereign bonds.

    It advised the government to boost fiscal spending if necessary. Amid forecasts of a surge in sovereign debt as a result, the KDI advised the government to come up with ways to bolster fiscal revenues. "It would be difficult to increase tax income at this point due to dire economic conditions, but tax hikes will become necessary over the mid to long term," it said.

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