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The Economic Impact of the Coronavirus
Cover Story
By Tony Michell Ph.D.
A full assessment of the impact of the coronavirus has to be differentiated by industry, size of firm and household income and occupation, by country and by duration of the epidemic. Impacts and rebound effects as the epidemic spreads across the world need to be considered.  The IMF and OECD and most other forecasters accept that 2020 will now see lower growth than 2019.  In the case of the OECD the chief economist expected growth to be 2.4% down from 2.9% in 2019, in a moderate scenario, pre Italy, pre Iran and Europe spread of the disease and pre the Wall Street drop. If things get worse, then the world economy moves towards 1.5%1.

But it was not forecast to be equally bad across the globe. In the moderate scenario OECD still expected Korea to manage the same growth as in 2020 as 2019 and India and Turkey to grow faster than in 2019.  As we are now in the more extreme scenario this is no longer the case for Korea.  But BOK’s February 27th revised forecast for 2020 still stood at 2.1% down from 2.3%.  Philipp Carlsson-Szlezak , Martin Reeves and  Paul Swartz in the Harvard Business Review on March 3 writing on “What Coronavirus might mean for the global economy?” say we must take a careful look at market signals across asset classes, recession and recovery patterns, as well as the history of epidemics and shocks, to glean insights into the path ahead2. Clearly their view of the global economy is a different perspective of  the impact from my approach which is less concerned with financial markets and much more with the real economy. 
In Korea to date, SMEs, the self employed and short term contract and non contract workers in the service sector have been most affected, while regular employees (about half the work force) have been relatively protected.  Manufacturing Industries have been temporarily stopped due to supply shortages – in the auto industry early on, and now the electronics industry, but are in a different category from hotels, airlines and tour companies for whom business lost in January, February and March will never be recaptured. The latest employment figures released on March 11, contain survey data from February 9 to 15, before phase 2 began, and suggest that at that date about 300,000 workers were affected, but this was masked by the government’s make work programme that created 570,000 jobs for the over 60s, of which 200,000 were usefully in the health and social care sector.  Net effect official unemployment fell from 4.7% to 4.1% YoY. The crisis runs through the following phases:
Phase 1: Few cases and only the impact of precautionary moves and partial panic Jan. 1 – Feb. 20
• Limited impact mainly supply chain and short stoppages for sanitary treatment • Consumers cut back on expenditure • Companies delay investment • Vulnerable service sector firms affected
Phase 2: Full blown epidemic Feb. 20 – Apr. 20
• Interruptions to production due to infection • Employees sent home or laid off • Supply chain and deliveries affected • Consumers further cut back expenditure • All firms living on cash flow affected • Business development stops • Investment and investment planning stops • International business travel and tourism stops • CAPEX destroyed on financial markets
ABOUT Tony Michell Ph.D.
Managing Director
Korea Associates Business Consultancy Ltd.
BIO
Tony Michell is Managing Director of KABC Ltd.  He has a Ph.D in applied economics from Cambridge University, worked for the Korean government as a five year economic planner in the 1970s and 1980s and subsequently as a consultant for the World Bank and ILO, and teaches Change Management and FDI Studies at KDI School of Public Policy and Management.  He convenes the monthly Korea Business Forum. For updates contact tonymichell@kabcltd.com.
Phase 3: Living with the tail of the epidemic Apr. 20 – Aug. 20
• Because of the timing and lags Korea and China begin to recover, but their markets and related supply chains in other countries are affected • Smaller companies go out of business including some domestic suppliers as their ability to survive a fall in business reaches its limits
• Unemployment rises sharply without government intervention • Business development still very difficult • Investment mainly at a low level as travel also difficult • Full recovery not possible until the last major countries enter phase 3 (so Aug 10 may be an optimistic figure)
Phase 4: Initial recovery Aug. 20 – Oct. 20
• A short leg v recovery makes up production, and some consumption.  This recovery is fast but curtailed by missing wealth destroyed • during Phase 1,2 and 3 • Large vulnerable companies at risk and need to retrench • Unemployment stays high (subject to government stimulus) • Bankruptcies continue as marginal businesses remain submerged • 52 hour week causes supply chain problems
Phase 5 Full recovery Oct. 20 – Mar. 31 2021
• Most GFC countries never recovered their old projected growth trajectory • More bankruptcies, conservative employement policies • World not likely to do so after initial short leg v, and becomes drawn out process as capital and social capital is rebuilt
Phase 1
China never experienced phase 1 because the early stages of the epidemic were concealed.  Phase 2 in Wuhan erupted in early January and has lasted until March. China outside of Hebei went through a very short Phase 1 before the epidemic had hit almost the whole country. Korea lived through Phase 1 during January and down to February 18th-20th when the Daegu/Shincheonji crisis began.  Phase 2 is hopefully likely to wind down sometime in April, if the Guro call center cluster can be contained (and there is no current certainty that it can easily be contained, as the workers come from all over Seoul, Gyeonggido and Incheon) and. no more large clusters emerge. In measuring the GDP impact in Q1 Jan-March, the first 50 days of a 91 day period were in phase 1 and the last 41 days in phase 2.  But phase 1 is a critical period as we see in its impact in the US and the UK and other European countries in terms of consumer demand.  Nervous consumers cut back on expenditure and credit card usage, but binge buy other items. Companies, also cut back mainly by postponing investment and slowing business development.  Consumers also switch to certain kinds of expenditure, especially from retail and eating out to on line shopping and food delivery services.  Capital destruction on the stock markets was huge.
Phase 2
Phase 2 is quite different as there are real stoppages, a massive cut in expenditure in normal service channels, an almost complete delay in all but on-going construction.  Less easy to track is the drop in household income amongst about one third of households that rely on temporary workers or self employment.   There is also some expenditure diversion as tourism and travel drops.  Working from home becomes common with empty buses and subways.  International business travel, let alone tourist traffic, almost grinds to a halt.

Working at home means that bureaucracy slows right down, delaying any relief for the people who apply for government handouts.

Those businesses which have no cash reserves and live on cash flow generally have bad credit records and become ineligible for rescue loans as provided by the government through banks, vulnerable households run out of cash and credit card limits and are unable to pay their monthly bills when they next come due. As in the credit card crisis of 2003-4, Korea’s unique “one default freezes all” credit system means that if people fall behind on payments on one item – even the phone bill – all personal credit is frozen. Phase 2 in Korea occupies 41 days of Q1 and 20 days of Q2.  China moved from Phase 2 to the beginning of Phase 3 after about two months. Korea is predicted to also make this transition in about the same time period.  But other OECD countries that lack the degree of central control and social discipline of China, and in a different way South Korea, may take much longer to pass through phase 2.
Phase 3
Phase 3 is a phase we do not yet fully understand, as we cannot predict where Europe and the USA, and for Korea, vitally, Vietnam, will be on April 20th.  There is on March 12th every indication that all these countries will be in the depth of phase 2.  This creates numerous supply chain problems. An extreme example is Samsung Electronics which is currently switching production of the new foldable phone from Gumi, which is too close to the Daegu epicentre, to Vietnam but wants to send 700 workers to their Vietnamese plant.  Neither country wants a movement of people on that scale. 

Korean subsidiaries of foreign companies (responsible for about 15% of Korea’s GDP) will probably find that their head offices in Europe and USA are working from home and decisions cannot be made in the normal way and supplies are interrupted.  CAPEX decisions will be delayed and existing plans by companies throughout the country will be reassessed.  

In all probability most temporary workers will not be rehired, as defacto 52 hour week decisions will continue.  For companies which have order backlogs unless the 52 hour week is relaxed, make up work will be difficult.  Tourism and international travel will remain at a low level as will the business of shops and restaurants.  Movie theatres and theatres and sporting events will remain under attended.  So Q2 will have 92 days of which 20 are in phase 2 and 72 in phase 3.  China outside of Hubei, which is not hampered by 52 hour weeks will make a faster recovery.   Inside Korea Daegu and North Gyeongsang Province will make a slower recovery than the rest of the country (assuming the Guro cluster can be contained.)
Phase 4
Phase 4 should begin for Korea in late August on current estimates.  Hopefully the rest of the world will be in Phase 3 by then, and we will get a short leg V (meaning the right hand up side is shorter than the left hand down stroke.)  Some segments of the economy make a rapid recovery. This means that sales should begin to be comparable YoY,  but depending on the companies or consumers who form the end market in Korea or overseas, this could be either a 60-75% recovery or a 80-90% recovery.  Business travel to those countries in phase 3 (or travellers returning from phase 3 countries) may still require 14 days self quarantine.  At least one third of Korean consumers will still be short of cash to make durable or semi-durable purchases, and will skimp on some luxury daily necessities.  There will still be supply chain gaps, unless skilful planning has taken place in Phase 3. 

Large chaebol groups dependent on retailing and domestic demand, like Lotte, CJ and Shinsaegae, and those already struggling with financial issues like Doosan and Kumho will require special attention. On March 11 Heung-A Shipping, Korea’s fifth largest shipping company, became the first big name to collapse after two years of losses, and no more assets left to sell. This is a good example of the vulnerable third of Korea’s listed companies. It is to be hoped that instructions have been issued to KDB to be gentle with coronavirus victims.

Investment planning will just begin again but items which take a long order time will not be available until 2021.  So of 92 days of Q3, 51 will have been in Phase 3 and 41 in Phase 4.
Phase 5
Phase 5 begins in October and run to the end of the first quarter in 2021.  It assumes that the rest of the world sorts itself out at least to phase 4 during this period.  30 days of Q4 are in Phase 4 and 61 in Phase 5.
When all this is added together the following possible YoY scenarios for GDP are shown in the table below:
While sufficient economic stimulus will reach the normally healthy part of the economy, there are grave doubts about even a mildly unconventional stimulus reaching the vulnerable third of Korea.  Only direct consumer handouts (as some Korean politicians are beginning to suggest) and central government guarantees to banks that defaults in 2021 or 2022 on emergency loans made to risky businesses will be fully compensated can minimise the economic down turn.  We need to add to the Korean credit card crisis of 2003-4 to our list of downturns and recoveries to feed into our scenarios and models of how the impact of the coronavirus on the Korean economy will evolve.   The table above gives the best estimate at this time.
March 27 Forecast Update
The article on the economic impact of coronavirus was written on March 15th about a rapidly evolving situation.  We now have a slightly better grasp on the economic situation, and data will come from the national statistics office between now and the beginning of next month about February data, and the quarterly GDP numbers given need to be significantly revised.  We will not have a complete data set for Q1 until BOK issues its advanced GDP figures on April 23.

Estimates for the GDP figures for Korea in 2020 proliferate.  There is a lack of a standard agreement on whether to give quarterly YOY results, quarter on quarter, or worse quarterly data annualised (as used in Japan and US national accounts).   Using KDI real won data (not percentages), based on a 10% GDP contraction in Q1 2020 YoY, Korea’s 2020 Q1 would be +0.44% or QonQ -1%.  Debate now focuses on whether Q2 would be a significant improvement.  Initial modelling suggest Q2 may be at about 0% YoY and 0.8% QonQ.  (Technical note QonQ data is seasonally adjusted GDP, not the unadjusted GDP data used for YoY.  This Q2 QonQ figure means that the Korean GDP would still be 0.2% below Q4 2019) for further queries and explanations email: tonymichell@kabcltd.com.
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