COVID | Economics & Growth | Fiscal Policy
South Korea is an often-cited example of a country that has successfully controlled COVID. And the economic fallout looks to be significantly less pronounced there than the dramatic declines reported elsewhere. But the country’s resilience cannot all be attributed to the more effective COVID response. Also important was having significantly greater policy space than most going into the crisis, thanks to low public debt and a very prudent fiscal position, which facilitated the required response from the budgetary and monetary authorities.
A Shallow COVID Recession
As Europe and the US start to see unprecedented declines in activity data coming through in March and April readings, it is instructive to rewind a few months to compare data from when Asia was at the epicentre of the COVID crisis. There are certainly some similarities, with earlier declines in IP, PMIs and retail sales in China being replicated across Europe and the US. And China’s ongoing Q2 bounce back is expected to be the Q3 story for Europe and the US, albeit with varying magnitudes.
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South Korea is an often-cited example of a country that has successfully controlled COVID. And the economic fallout looks to be significantly less pronounced there than the dramatic declines reported elsewhere. But the country’s resilience cannot all be attributed to the more effective COVID response. Also important was having significantly greater policy space than most going into the crisis, thanks to low public debt and a very prudent fiscal position, which facilitated the required response from the budgetary and monetary authorities.
A Shallow COVID Recession
As Europe and the US start to see unprecedented declines in activity data coming through in March and April readings, it is instructive to rewind a few months to compare data from when Asia was at the epicentre of the COVID crisis. There are certainly some similarities, with earlier declines in IP, PMIs and retail sales in China being replicated across Europe and the US. And China’s ongoing Q2 bounce back is expected to be the Q3 story for Europe and the US, albeit with varying magnitudes.
Dramatic declines in activity data have, however, mostly been avoided in South Korea despite the significant COVID outbreak in February. The economy contracted in the first quarter, with a sharp drop in consumer spending/services driving the -1.4% QoQ reading. But that was not nearly as pronounced as the 3.3% decline in Q4 2008. The manufacturing PMI has also held up remarkably well. April’s 41.6 print was the weakest in more than a decade but remains above the GFC low and higher than in many other countries. The absence of an economy-wide shutdown is undoubtedly a key factor in the better macro performance, with the country relying instead on tech and high levels of screening. However, that approach alone was not enough to prevent another wave of cases in Singapore. We can also see South Korea’s modest COVID impact in IMF forecasts, which project the economy will shrink by just 1.2% this year – by far the shallowest recession expected across advanced Asia (Chart 1).
Helped By Significant Fiscal Buffers
The starting point also matters. South Korea’s fiscal position was in better shape than even Germany’s going into the crisis, with public debt at just 41% of GDP and the budget in surplus for around 20 years (Chart 2). Appetite for fiscal easing became evident late last year in response to the sharp growth slowdown given South Korea’s high dependence on trade and semiconductors. The Bank of Korea also cut interest rates twice last year as stress in global manufacturing and exports took its toll on the economy.
South Korea’s COVID response may well be a model for others. But the better macro performance is also a function of the policy support that was already underway before the COVID outbreak, and earlier savings, both public and private, which have provided space to respond to the shock.
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