South Korea’s economy is forecast to see a sharper-than-expected contraction of 1.3 percent this year under the coronavirus pandemic, the central bank said Thursday, fueling concerns that this year may see one of the worst negative growth figures in decades.

In May the Bank of Korea slashed the growth forecast from the previous minus 0.2 percent. The May revision sent shock waves across the nation, as it was previously expecting a 2.1 percent expansion since February.

BOK Gov. Lee Ju-yeol explained that the minus 1.3 percent forecast was made on the premise that Korea’s social distancing guidelines would remain at Level 2 in the government’s three-tier system.

If the economy actually contracts 1.3 percent, it would mark the third time that Asia’s fourth-largest economy experienced negative growth. The other occasions were in 1980, when it hit minus 1.6 percent as a result of the global oil shock, and in 1998, when it posted minus 5.1 percent as the economy was reeling from the Asian Financial Crisis.

The BOK also adjusted its 2021 growth forecast downward to 2.8 percent from 3.1 percent, signaling weakened momentum for recovery in the post-virus era.

Under a worst-case scenario in which the COVID-19 resurgence continued into the winter or the fourth quarter of 2020, the growth forecast would plummet even further to minus 2.2 percent, the BOK said. The economy would expand 1.2 percent next year under the same scenario.

But the central bank kept its benchmark interest rate frozen at the record-low level of 0.5 percent. Lee left room for further rate cuts, saying they could be carried out in the event of a bigger economic shock, but added that such monetary decisions must be approached cautiously.

The central bank’s announcement comes as the number of daily new coronavirus cases here spiked to a nearly six-month high of over 400 on Thursday, surpassing the 400 threshold for the first time since March 7. Korea had contained its daily tally of new cases to double-digit figures for months until mid-August, when the number surged above 100. It has stayed in the triple digits ever since, pushing the nation to impose Level 2 social distancing on Sunday.

“When the previous growth forecast was announced in May, it seemed the global spread of COVID-19 would eventually slow down in the second half of the year,” Lee said in a press briefing.

“But it hasn’t been slowing down and there has been a resurgence in Korea -- we have adjusted the forecast because of the current slower-than-expected exports and spending,” he added.

The latest resurgence coupled with the latest growth forecast is likely to dampen the mood for the Moon Jae-in administration, which has been largely in a celebratory mood since the Organization for Economic Cooperation and Development’s decision earlier this month to raise Korea’s on-year growth outlook for 2020 to 0.8 percent, citing its “successful response” to the pandemic. At the time, OECD added that any resurgence of the virus would lead to a 2 percent contraction of the economy.

In June, the government said it expected an overall 0.1 percent expansion of the economy.

“Although the decline in exports has moderated a bit, the improvement in private consumption has weakened,” the BOK said in a related report released in English.

“Labor market conditions have remained weak, with the number of persons employed continuing to decline sharply. Uncertainties around the future path of GDP growth are also judged to be very high.”

By Jung Min-kyung (mkjung@heraldcorp.com)