There's No Escaping the Slump Even for Virus Stars

(Bloomberg Opinion) -- You can have a good war and still be seriously wounded.

South Korea has been relatively successful at controlling Covid-19 infections, and made good progress in reopening its economy. But it's still suffering a serious downdraft, with consumers pulling back at home and demand collapsing in key trading partners. Some kind of recession for this trade-dependent economy looks assured; only the scale is in question.

There's a lesson there for other open, trade-dependent places like New Zealand and Australia that deserve a measure of commendation for containing the virus. Unfortunately, the economic rewards will probably be elusive. With the global outlook bleak and international movement of people likely to remain subdued for an extended period, hopes of a return to growth have been kicked into the third quarter. Even then, it will be a long slog as the world's biggest commercial powers struggle. These pandemic stars don't control their own destiny.

The specter of deflation is haunting the world, as I wrote here last week, and South Korea is in its sights. Consumer prices rose 0.1% from a year earlier in April, the government said Monday. That was well below economists' forecasts and a world away from the central bank's 2% target. Inflation was quiescent even before the pandemic. An outright decline in prices now looks a serious possibility despite unprecedented easing by the Bank of Korea and a robust dose of fiscal stimulus from President Moon Jae-in. Long term support for the economy is warranted.

Anemic inflation reflects the extent of deterioration in the global picture and shell-shocked local conditions. Gross domestic product shrank 1.4% in the first quarter, led by a 6.6% nosedive in consumption that was the worst outcome since the 1997-1998 Asian financial crisis. Exports, which account for about 40% of the economy, cratered 24.3% in April from a year earlier. Shipments to China fell 18%. To the U.S. and the European Union, they dropped 13%.

Moon has managed to keep a lid on the virus at home, quelling a late February surge through aggressive contact tracing, mass testing and social distancing. But as with Australia and New Zealand, there's no easy way back for the economy. The worst global downturn since the 1930s, coupled with the likelihood that the pre-virus vim won't return for years, points to a need to reorient economic priorities. Whether recessions are shallow or deep compared with the rest of the world will depend on the degree to which domestic economic engines can fire. This won't be easy. Engagement with the world made these countries prosperous. Enmeshment in global supply chains and cool-sounding tourism promotions won't be the ticket to prosperity they once were.

Leaders in Seoul, Canberra and Wellington must contemplate a thorough re-engineering of the economic models that have dominated policy development since at least the 1980s. Containing the coronavirus was essential to avoiding a social and economic collapse; it doesn't make the recovery any easier. Sadly, medals for the public-health response won't pay the bills.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.