South Korea enters recession as exports plunge by most since 1963

South Korea slipped into a recession in the second quarter in its worst economic decline in over two decades as exports plunged due to the coronavirus pandemic.

As social distancing curbs paralyzed factories in South Korea, the country’s economy shrank by a seasonally adjusted 3.3% in the June quarter from three months earlier when it contacted 1.3%, the Bank of Korea said on Thursday.

That is the sharpest contraction for Asia’s fourth-largest economy since the first quarter of 1998 and steeper than a 2.3% decline based on a Reuters poll.

The country’s gross domestic product had also a fall of 2.9% in year-on-year terms, the biggest drop since the fourth quarter of 1998 and worse than a 2.0% decline seen in the poll.

Accounting for nearly 40% of the economy, exports were the biggest drag on growth, decreasing by 16.6% on-quarter to mark the worst reading ever recorded since 1963.

South Korea’s POSCO, the world’s fifth-biggest steelmaker, said it had a drop of 84.3% in operating profit in the second quarter as global demand for steel declined.

Also on Thursday, the world’s No. 2 memory chip maker SK Hynix issued a warning, saying there is uncertainty in the second half, even as its second-quarter operating profit tripled.

“While consumer spending should gradually recover, the threat from the virus is unlikely to fade entirely and some social distancing will probably have to remain in place,” Capital Economics Asia Economist Alex Holmes said.

“Meanwhile, global demand is only likely to recover slowly which will weigh on the export recovery.”

Also, while construction investment went down 1.3% quarter-on-quarter, capital investment dropped 2.9%.

South Korea joins Japan, Thailand and Singapore in technical recession, which means two straight quarters of decline amid the pandemic that is badly affecting Asia’s trade-reliant economies.

However, analysts and policymakers are expecting a recovery that would be faster than those of its regional peers.

“It’s possible for us to see China-style rebound in the third quarter as the pandemic slows and activity in overseas production, schools and hospitals resume,” said South Korean finance minister Hong Nam-ki said after the data was released.

He also said the unprecedented shutdown of the global economy brought to a halt Korean companies’ overseas production lines in Vietnam and India, further impacting exports.