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(News Focus) MERS outbreak batters sputtering Korean economy

2015/06/18 09:52

By Lee Joon-seung and Koh Byung-joon

SEJONG/SEOUL, June 18 (Yonhap) -- Nearly a month after the first case of Middle East Respiratory Syndrome (MERS) was confirmed, the South Korean economy is feeling the pinch of the outbreak as it has made a big dent in consumer spending and battered some industries.

Unless the MERS outbreak is brought under control at an early time, some observers warn that its fallout will spill over into other industrial sectors, making Asia's fourth-largest economy grow at a rate below 3 percent in 2015. Last year, it expanded 3.3 percent on-year.

Since the first case was confirmed on May 20, MERS has claimed 23 lives and infected 165 people, with more than 6,700 others put under quarantine.

The outbreak of the viral disease comes at the worst possible time for South Korea's economy as it has just started showing signs of modest recovery in consumer spending but is still struggling with sagging exports, according to analysts.

According to official data, consumer spending rose a healthy 1.6 percent on-month in April and jumped 4.9 percent from a year earlier, but it's sharply down this month, when the first MERS-related deaths were reported.

As citizens stay home and shy away from crowded places to avoid possible infections, big retailers have suffered setbacks in sales.

In the first week of June, department store sales nosedived 25 percent from the same period a month earlier, with sales at large discount chains dropping 7.2 percent.

There was even a decrease in purchases made by credit cards, a clear sign that people are spending less.

Amid the MERS scare, visitors are scarce at the 22nd Busan International Food Expo held in South Korea's largest sea port of Busan on June 17, 2015. (Yonhap file photo)  Amid the MERS scare, visitors are scarce at the 22nd Busan International Food Expo held in South Korea's largest sea port of Busan on June 17, 2015. (Yonhap file photo)

Hit hardest are the tourism and travel industries, as the MERS outbreak has made foreign tourists, especially the Chinese, cancel their trips to South Korea in droves.

According to the state-run Korea Tourism Organization, nearly 120,000 foreigners, mostly Chinese, canceled their visits to South Korea in the first 16 days of this month.

The number of travelers tumbled 20 percent in the first 10 days of June from the sale period a year earlier, translating into a loss of US$11 million.

With trip cancellations soaring, both Korean Air Lines Co. and Asiana Airlines Inc., the country's two largest full-service carriers, have reported a sharp drop in passenger traffic, announcing plans to reduce flights to China.

Korean Air said it will scale back its flights to and from China for about a month starting Thursday, affecting 17 out of some 30 Korea-China routes and translating into 66,000 fewer seats available for passengers. Also subject to the reduction will be flights for Hong Kong, Shanghai and Qingdao, from which booking rates have been declining recently.

Asiana Airlines already whittled down its flights to and from China last week. It is expected to provide 52 fewer flights until June 30, which would affect seven routes linking Korea to China and Taiwan.

The MERS outbreak is also feared to have an impact on other industries.

Tech giant Samsung Electronics Co. has advised workers not to travel to the Middle East, while Hyundai Motor Co., the country No. 1 automaker said it has entered into a "crisis mode" to make certain its workers follow necessary steps not to catch MERS.

In a move to ease concerns, organizations like the Federation of Korean Industries issued statements stressing its members will conduct business as usual and for the general public not to be overly concerned about MERS.

Watchers also worry that the MERS scare will hurt employment that is critical for sustainable growth. In May, 379,000 new jobs were created, up from 216,000 in April, but the number is feared to fall again in June.

"If MERS is not contained soon, such developments will start to hurt production and income and even rock the economy as a whole," said Lee Jun-hyup, a research fellow at Hyundai Research Institute. "There is a risk that MERS can pour cold water on consumption that may not recover even in the second half."

   Echoing such an alarm bell, the Korea Economic Research Institute (KERI) predicted that if the outbreak is contained by late June, the GDP loss will be limited to little over 4 trillion won. But if it takes three months to get the disease under control, the loss will snowball to over 20 trillion won.

"In the best-case scenario of the MERS spread ending this month, the GDP will contract 0.26 percent, while it can be pulled down by as much as 1.31 percent if the current situation continues till late August," the think tank claimed.

Similar estimates were released by foreign investment banks, which said if MERS is brought under control quickly, the impact will be limited to a 0.15 percentage point dip in growth. They warned this could rise to 0.8 percentage point if it drags on for three months.

Such predictions are bad news for the South Korean economy, which is expected to grow in the low 3 percent range in 2015.

KERI said that because of the MERS outbreak, South Korea's GDP growth will likely fall to 2.8 percent, which is lower than the 3.1 percent estimate released by the Bank of Korea in early April.

With the MERS outbreak showing no signs of easing, there is growing pressure on the government to ask the National Assembly for an extra budget, which, coupled with the central bank's recent rate reduction, is widely expected to help prop up the economy.

In a blitzkrieg move a week ago, the Bank of Korea slashed the benchmark interest rate by a quarter percentage point to a record low of 1.5 percent, citing the negative impact of MERS on the economy.

The government has not formally committed itself to the extra budget demand, fearing a rise in household debt, but Finance Minister Choi Kyung-hwan said Wednesday that some sort of economy-bolstering measures will be announced within the month.

yonngong@yna.co.kr

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