Thinking about the economic effects of COVID-19: Part I

Weeks became months. It almost seems now that the situation will never end. The Korean government has been informing that the next two weeks will be the peak, but it sounds like a déjà vu from last week (Maybe they say two weeks to give the public some hope). Good news is that the number of cases has been declining recently.

Most people now wear masks at restaurants, cafes, and even when taking short stroll outside. It make you feel like a criminal to cough without covering your mouth and nose (maybe you are indeed, for spreading the virus). Our family also limited our outdoor activities, contact with neighbours or passerby, and casual dining outside.

How long the COVID-19 will hang in the air is very uncertain now. Just a few weeks ago, I read articles that some experts predict that the situation should be over by July, but recent news about the spread of virus in Europe and North America surely makes me doubt the prediction.

Anyway, the chart below clearly shows how vulnerable Korean market is to the movements in China and the U.S. markets.

Source: Bloomberg

When SHCOMP (Shanghai composite index) fell in mid-Jan, KOSPI, albeit in lesser magnitude, followed a similar pattern. KOSPI, SPX and SHCOMP then slowly recovered until Feb. 19th, when SPX began to plunge.

The stock market will eventually recover, maybe soon after the pandemic is over or maybe in a year or more. But just how much of that loss was funded by risky loans? It worries me that the total credit to households in Korea is already high (93.9% as a percentage of GDP, in Q3 2019). It’s only behind 7 countries (Australia, Canada, Denmark, Netherlands, Norway, Switzerland) out of 52 countries measured by the BIS.

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