(Bloomberg) -- South Korea’s central bank meets this week with Governor Lee Ju-yeol flagging the fragility of an economic recovery threatened by the resurgence of the virus.
With the country facing a possible slowdown in demand at home and abroad, the Bank of Korea is expected to maintain its support for the economy on Friday by keeping interest rates at a record low and showing a readiness to help stabilize markets if necessary.
In a series of speeches marking the start of 2021, Governor Lee said the economy is surrounded with uncertainties and said a K-shaped recovery could leave the vulnerable groups excluded from any rebound.
Korea’s outlook for this year hinges on whether it can contain the latest Covid outbreak without resorting to more drastic measures, and the timing of the arrival of vaccines. Unlike some other countries that have already started inoculating some segments of the population, Korea is still waiting to get its supply of vaccines, another factor that makes its recovery precarious.
As concern builds over the prospect of losing momentum in the first months of 2021, the government has announced a front loading of its record budget in the first half of the year. It will also deliver a third cash handout to millions of Koreans before the Lunar New Year holiday next month.
BOK’s Lee said last week financial institutions faced a “test of crisis management” and highlighted an emerging gap between market expectations and economic reality. “Even a small shock could rattle markets” under these circumstances, Lee said.
The comments came amid a rally in Korean stocks and housing prices, supported by liquidity and cheap loans put in place to fight the pandemic. The rapid gains are raising concerns over their sustainability and the risks of insolvency should the economy take a sudden turn for the worse.
Economists expect the BOK to keep its benchmark rate on hold this year as it balances the need to prop up growth and guard against such financial risks.
In the meantime, Korea’s growth will depend much on renewed lockdowns overseas not hitting exports in the same way as last spring.
“Exports will be the key pillar of support for growth, before vaccine becomes widely available,” said Angela Hsieh, an economist at Barclays Bank Plc. “The quality of growth and the divergent performances of the underlying economies will continue to be a headache for policymakers.”
Korea’s exports rose by the most since 2018 last month, buoyed by demand for technology products such as smartphones and semiconductors during the pandemic.
A revival of consumer demand in developed nations making vaccination progress would offer further support. Continued export growth could in turn fuel facilities investment by Korean firms.
Analysts surveyed by Bloomberg see the economy growing 3.2% this year, largely in line with government and BOK forecasts, led by exports.
Still, without a revival of domestic drivers such as consumption, the outlook for Korea’s job market and wages remain downbeat. After months of job losses led by the services sector, the country has started to see positions shed in the manufacturing sector, suggesting the economic toll of the pandemic is broadening.
A key factor for the outlook will be the timing of widespread inoculation. Having focused on developing test kits and containing the virus, President Moon Jae-in’s administration is facing mounting criticism over its relative slowness in procuring vaccines. In a New Year speech on Monday, Moon said the government plans to offer Covid vaccines for free to citizens starting next month.
Citigroup forecast that Korea would achieve full immunity by the fourth quarter, and said the recovery in consumption and employment will be “on and off” and varying by sector until then.
“The outlook for domestic demand is pretty bleak,” said Miguel Chanco, Asia economist at Pantheon Macroeconomics. “Needless to say, the risks are weighted heavily to the downside.”
For more articles like this, please visit us at bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2021 Bloomberg L.P.