|J.P. Morgan Chase headquarters in New York / AFP-Yonhap|
By Kim Jae-kyoung
The economy will likely contract 1 percent in the first quarter of this year from a quarter ago due to the fallout of the novel coronavirus, J.P. Morgan Chase forecast Friday.
In its latest report, the global investment bank said that the key culprit behind its pessimistic outlook was the supply chain disruption from the coronavirus outbreak, which it expects will deal a heavy blow to the country's manufacturing industry.
The bank expects the faster-than-expected spread of the virus, and expanded Chinese factory shutdowns, to drag China's first-quarter GDP growth down to 1.0 percent at a seasonally adjusted annual rate quarter-on-quarter, causing Korea's first quarter GDP to contract 1.0 percent.
In its previous prediction made before the beginning of the virus outbreak, the bank had expected that the Korean economy would slow to 0.5 percent growth during the first three months of the year.
It pointed out that Korea's manufacturing sector is closely linked by supply chain with China, exporting 41 percent of intermediate goods to China and importing 23 percent of intermediate goods from China.
"Thus, a halt in Chinese industrial production would negatively affect both Korea's exports and production ― supply side through a shortfall of Chinese intermediate goods supplies," it said.
Against this backdrop, the bank expects the Bank of Korea (BOK) to lower its key interest rate this month.
"This unexpected shock should drag down 2020 annual growth, widening the negative output gap by more than previously assessed," it said.
The bank lowered its 2020 annual growth outlook for Korea to 2.2 percent from 2.3 percent.
"As a result, we now expect the BOK to cut the base policy rate in February by 25 basis points, but consider this a close call."