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The COVID-19 pandemic jolted the global economy last year, with countries around the world suffering from unprecedented negative economic growth. South Korea was no exception. Last year, the country experienced a major crisis that was as serious as the Asian Financial Crisis in the 1990s, when the local economy and society were grievously wounded. 

Fortunately, both the global economy and the Korean economy are projected to make a rebound in 2021, on the assumption that COVID-19 vaccines and treatments will be distributed fast to alleviate the economic impact of the pandemic gradually. Here is Lee In-chul, director of the Real Good Economic Institute, to examine how the Korean economy and the global economy may evolve in the hopeful year of 2021. 

The global economy contracted last year due to the unexpected pandemic. But it is forecast to make a modest recovery this year. The Bank of Korea predicts that the global economy will see an improvement in investment sentiment and trade conditions this year. This is as major economies continue to carry out measures to stimulate the economy and there is progress in the development of COVID-19 vaccines and treatments. 

But the central bank believes that uncertainties will still linger over the future course of COVID-19. 

By region, advanced countries will likely see an economic recovery on the back of aggressive expansionary fiscal policies. While China is expected to maintain its recovery trend, emerging economies are projected to recover rather slowly. In brief, the global economy is likely to rebound this year, due to the base effect coming from last year’s negative growth. However, it will take a considerable amount of time to overcome the economic fallout from the pandemic.  

Major economies like the U.S. and China are forecast to see a relatively robust recovery this year. 76 global investment banks have estimated that the GDP of the U.S. will increase 3.8 percent this year, the highest figure in 20 years. Also, many predict that China will post a high growth rate of between 7.8 percent and 9 percent. 

The Bank of Korea anticipates that the U.S. economy will grow in the three-percent range this year to achieve a V-shaped recovery with a strong rebound. Last year, demand and production contracted in the U.S. due to strict lockdown measures. This year, the Joe Biden administration is expected to combine various policies, in consideration of economic indicators, including growth, employment and distribution. Perhaps, it will push for sustainable policies aimed at lifting the potential growth rate in the mid- to long-term. 

China, where the virus originated, pulled out of the pandemic crisis faster than any other country. It is forecast to achieve high growth this year. China’s growth is important for Korea, since it has much to do with Korea’s exports. The Federation of the Korean Industries expects that the Chinese economy will grow 7.8 percent this year, the highest level in eight years. 

Despite the shock triggered by COVID-19, the Korean economy fared relatively well last year, thanks to its strong exports. China’s earlier-than-expected economic recovery contributed to increasing global trade volume, from which Korea’s exports benefited. This year, a sharp rise in growth rates in major economies and the possible South Korea visit by Chinese President Xi Jinping are expected to have a positive impact on the Korean economy. 

Against the backdrop, the Korean economy is likely to recover at a modest pace in 2021. The government and major institutions inside and outside the country expect the growth rate for the Korean economy this year to range between 2.5 to 3.3 percent. But many point out that it is too early to conclude if the economy has entered a full recovery phase. 

This year, we need to pay attention to three major aspects of the Korean economy, namely, national debt, employment and the real estate market. 

Korea’s national debt this year is estimated at 956 trillion won, with the debt-to-GDP ratio forecast to exceed 47 percent. In 2022, national debt will likely surpass 1,000 trillion won. I think it’s urgent to introduce a fiscal rule that keeps national debt at a certain level. 

Second, it is estimated that more than 220-thousand jobs disappeared last year in the aftermath of the pandemic. The government expects that 150-thousand jobs will be created this year. The pace of recovery in the job market may vary, depending on how effectively the country will overcome the COVID-19 crisis. 

Third, housing prices soared last year to deepen asset polarization. In 2020, home prices and jeonse rental prices jumped at the sharpest pace in 14 years and 9 years, respectively. 

Many analysts predict that housing prices will continue to rise this year, considering the amount of new homes offered and the low interest rate. Still, the government expects that its real estate policy will have the intended effect to stabilize the housing market. 

The COVID-19 situation has brought about radical changes to economic and industrial environments in Korea. A large-scale fiscal policy has become common in the course of coping with the pandemic. Non-face-to-face services have increased considerably in daily life, while video teleconferences have become a new norm. The expansion of new technologies such as 5G and AI has accelerated the digital transition of the economy.

Even if the distribution of COVID-19 vaccines prompts the global economy to get back on track this year, these pandemic-triggered changes are likely to continue.

The pandemic has spurred the arrival of the contactless era, which people have now adapted to. While face-to-face businesses have been declining, home workout programs and over-the-top media services are booming. 

Korea’s key interest rate has already fallen to a zero-range figure, and the country is likely to maintain the current level, rather than cutting the rate further. For some time, it is assumed that Korea will depend more on fiscal policies to spend the budget than monetary policies involving the interest rate. In the industrial environment, a global competition is anticipated for new businesses related to the fourth industrial revolution. 

Analysts believe that whether or not to adapt to these changes will determine the competitiveness of Korean companies. Automobiles, shipbuilding and petro- chemistry have led the Korean economy thus far. But the share of these traditional industries in the economy has become smaller and smaller, while companies that have successfully introduced innovative technology are growing into global leaders. Industry watchers say it is necessary for traditional industries to sharpen their competitiveness by incorporating information telecommunications technology. The government, for its part, is advised to provide necessary support and examine regulatory reform. 

The Korean economy faces the daunting challenge of overcoming uncertainties both at home and abroad. First of all, it is important to secure vaccines and inoculate people as early as possible. Korea has already signed deals with foreign companies including, Moderna and Astra-Zeneca, to buy vaccine doses for the entire population. Also, it is crucial to implement deregulatory measures so companies can drive technological innovation and enhance their competitiveness. Last but not least, the government needs to respond properly to the economic policy of the Biden government and a new global trade environment. This year, Korea stands at a major crossroads in fighting the pandemic and getting its economy back to normal. 

The New Year has set in, but the prospects for the Korean economy are not entirely bright. The third wave of COVID-19 infections has not shown signs of abating, while consumer sentiment remains low. External factors may weigh down on the local economy at any time. Even so, we still have hopes that 2021 will be better than 2020 and that we can resume our economic activities soon to restore our precious, normal lives.