The COVID-19 cases resurged in Korea
New cases jumped as clustering hit the capital area
The daily new COVID-19 cases started to jump in Korea from 14th August, reporting an average of 225 cases daily between 14th and 20th Aug. The government eased mobility restriction in early May and while more cases were reported subsequently, the daily average only stood at 41 for the period between 15th May and 14th August. The outbreak in the recent days is mostly associated with clustering in the capital areas (Seoul, Incheon and Gyeonggi).
Social distancing could be tightened following the data-dependent strategy
The Korea government adopts a data dependent strategy, following which the average daily new case number is a key parameter in setting the mobility restriction standard. The government has increased the social distancing required to level 2 for the capital areas on 16th Aug, suspending certain activities. As the new cases are at triple digits for the past days, escalating the criterion for the level -3 social distancing requirements, the government may have to tighten the social distancing requirement to the top level.
Increased uncertainties to the economy
One of the key distinctions between the current outbreak and the initial outbreak in February is that the current outbreak hits the capital area directly. This area accounts for more than 50% of Korea's GDP and population, much more the 9% of GDP owned by Daegu and Gyeongbuk area– where the February outbreak hit. Therefore, comparable outbreak and mobility restrictions, if it takes place, may have a much bigger economic impact. We originally expected Korea's GDP to recover in 3Q, but the current outbreak places uncertainties to our forecast.
Past experience and a clear strategy may help
Korea has been widely regarded as one of the most successful economies in managing the outbreak, with a strong track record in managing the larger scale February initial outbreak in less than a month. The current outbreak takes place in a more populated area. However, its scale is smaller and more experience has been accumulated in the past six months. Therefore, we believe that the government could likely manage to flatten the curve again by mid-Sep, similar to what they managed to achieve in February. Under such as assumption, we maintain our full year GDP forecast at -2%, against the BoK's current forecast at -0.2% (with downside risk). This forecast takes into account a better than expected 2Q, but interruptions to recovery path in 3Q (UBS estimates: -0.4% QoQ) and a rebound in the 4Q (UBS estimates:+2.3% QoQ).
Fiscal and targeted liquidity response is more likely than further rate cuts
The BoK will hold the last 2Q meeting on 27th Aug, despite the outbreak, we maintain our view that the BoK will hold the benchmark interest rate at 0.5%. If necessary, we believe BoK could provide liquidity support to the needed areas. To assist in pandemic management and support the recovery, we see scope for the government to provide further fiscal supports, especially to the affected businesses, job retention programme and social welfare areas. Despite three supplementary budgets, the total fiscal deficit is at 5.8%, much smaller compared to other economies.