How Much Will Global Economic Data Deteriorate? Using South Korea as a Leading Indicator

Executive Summary

As concerns continue to grow about the economic impact from the spread of COVID-19, analysts have struggled to get their arms around the possible fallout. To a large extent, this reflects the uncertainty about just how much the virus will spread, a near impossible thing to forecast at this point in time. Regardless, some economic damage has already been done, and in the weeks and months ahead global economic data will likely begin to reflect the ongoing challenges presented by the virus. But just how bad will the deterioration be?

Given that the outbreak began in China, it makes sense that a weakening in the economic data would first show up in China. Indeed, we have already begun to see this, as February PMI data in China were extremely weak, and auto sales in the nation were down 80% year-over-year in February. That said, China may not be the best benchmark for assessing the potential slowdown elsewhere in the world. China's economic data are generally not nearly as detailed or reliable as figures found in most developed market economies. Furthermore, China continues to have the overwhelming majority of global cases of COVID-19, and has taken the most drastic public health policy steps to combat the virus. Thus, while monitoring Chinese economic data in the months ahead will of course be important for financial market participants, it may not offer much in the way of clues for how a broader outbreak could impact the economic performance of a country like the United States.

If not China, which country might offer the best first look at how the virus is impacting industries like manufacturing, air travel and dining out? In our view, closely monitoring the South Korean economy in the months ahead could offer some useful clues as to how a more widespread outbreak could impact major developed market economies where the disease appears to have arrived later, such as the United States. At present, South Korea has the second most confirmed COVID-19 cases at roughly 6,000. South Korea also reports diverse and rich economic data that allow us to examine how certain sectors performed as the number of cases grew from zero to several thousand.

Of course, the comparison between the South Korean economy and another like the United States is not perfect. South Korea is significantly more exposed to external demand, for example, and private consumption accounts for about 20 percentage points less of Korean GDP than it does in the United States. And the policies adopted in response to the virus, such as quarantines or travel restrictions, are likely to vary between any two countries, which in turn can create different economic outcomes. That said, given the unchartered territory in which the world economy currently finds itself, in this report we examine a handful of different economic indicators in South Korea we will be keeping an eye on going forward. Then, as new data on these indicators are released, we will update our analysis one to two months from now and assess what it may be able to tell us about economic data deterioration elsewhere in the world.

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