The world should look at South Korea as an ‘exit strategy’ to recover from pandemic, economist says

Saheli Roy Choudhury | CNBC : The world should look to South Korea's handling of the coronavirus outbreak as a way to emerge from the pandemic without severely affecting economic growth, one economist told CNBC on Thursday.

South Korea saw a rapid increase in cases starting late February when the flu-like disease spread rapidly among members of a religious group. By mid-April, daily reported cases of infection fell well below 100. The country embarked on mass testing efforts and strict social isolation measures but didn't totally shut down businesses.

As a result, it managed to contain the virus outbreak without suppressing economic activities, said Trinh Nguyen, a senior economist at French investment bank Natixis. 

Many countries, including India and several Southeast Asian nations, remain under lockdown where all nonessential businesses are closed and people aren't allowed to socialize in public. Those strict measures, aimed at stopping the virus from easily spreading, are taking a toll on their respective economies. 

But health experts have warned that premature lifting of those restrictions, without proper containment measures in place, could lead to a second wave of virus outbreak. 

"I think the world should look at South Korea as an exit strategy because it has institutions in place to trace and quarantine," Nguyen told CNBC's "Squawk Box," adding that as a result, "We have this outperformance of Q1 1.3% year-on-year growth and a sequential contraction that's quite minor relative to China." A couple wearing face masks amid concerns over the COVID-19 novel coronavirus walks through a market in Seoul on April 22, 2020. 

Earlier Thursday, the Bank of Korea reported preliminary first-quarter gross domestic product numbers. 

The South Korean economy grew 1.3% year-on-year, which came in better than expected but marked the "sharpest pace of contraction since the global financial crisis," analysts at ANZ Research wrote in a note. 

On a seasonally adjusted basis, the economy contracted 1.4% in the first quarter compared to the three months before, registering a sharp 6.4% decline in private consumption as people stayed indoors.

Recovery an uphill battle 

South Korea still faces an uphill battle to return to normal levels of expansion. 

Exports fell 2% for the first quarter from three months prior. For the first 20 days of April, exports tumbled nearly 27% on-year, and shipments are set to decline further as major trading partners including Europe and the U.S. remained in lockdown, Reuters reported. 

Economists agreed that global shutdowns will take a toll on South Korea's exports in the second quarter. 

"The lack of demand from the rest of the world is going to come back and bite back Korea in the second quarter, and I think that's one of the reasons why I think more help is going to be needed there," Nguyen said. 

President Moon Jae-in on Wednesday announced a relief package worth 40 trillion Korean won ($32 billion) for industries disrupted by the pandemic, such as aviation and shipping, as well as an additional job protection scheme worth 10 trillion won, Yonhap News reported.

Citi economists predicted government consumption is likely to be large in the second quarter and there'll be a slight improvement in private consumption. 

Reviving domestic demand

Reviving domestic demand could be a challenge. Citi economists said private consumption depends on the macroeconomic factors and employment.

Natixis' Nguyen explained that even with low reported infection numbers, normalization of consumption is contingent on "Koreans' willingness to actually want to shop, want to consume, knowing that their expectations of the future is worse than today," she said.

South Korea has started easing some of its social distancing measures. 

Apart from weak consumer and business sentiment, which was already low, another impediment to reviving domestic demand is "rising unemployment," Lloyd Chan, an economist at Oxford Economics, said in a note.

Nguyen said that she expects the South Korean economy to decelerate in the second and third quarters before picking up in the fourth quarter. For the full year, she predicted a 0.5% expansion from a year ago.

ANZ analysts wrote that South Korea's second-half recovery, while likely, also remains contingent on "the progress in slowing the global spread of COVID-19, and the pace of normalization in post-lockdown economic activity in Korea's major trading partners."