The Bank of Korea (BOK) said unemployment and other economic fallout from the pandemic will accelerate already existing declines in South Korea’s potential growth rate.
Higher jobless rates, more people dropping out of the workforce, and a delayed recovery in corporate investment will exacerbate a downward trend that started before the coronavirus, the bank said in a report.
Slowing population growth and the economy’s maturation were reasons the BOK last year cut its estimate for South Korea’s potential growth rate to 2.7%-2.8% for 2016-2020, down from rates above 3% for decades before that. An economy’s potential growth rate measures what it can theoretically produce without causing inflation to rise or fall.
One positive factor that could help slow the decline would be if productivity improves amid a switch to a more a digitalised economy, the BOK said. President Moon Jae-in has pledged to create more tech jobs as part of a “New Deal” project that aims to boost South Korean innovation.
Still, the BOK’s report said it could take two to four years for employment to reach pre-pandemic levels, raising the risk of a jobless recovery as business hire less and people stop looking for work.
Inflation may also stay low for some time as people respond to the crisis by saving more and shifting to online shopping, the BOK said. The central bank also said the government’s latest expansionary policies are aimed at disaster relief and unlikely to drive prices higher.
The BOK has cut its key rate by 75 basis points this year to a record low 0.5% to cushion the economy and keep companies afloat. This month, it extended its unlimited liquidity supply via repurchase agreements until the end of July.