By Cynthia Kim and Joori Roh

SEOUL (Reuters) – The South Korean economy plunged into recession in the second quarter in its worst decline in more than two decades as the coronavirus pandemic battered exports and social distancing curbs paralysed factory output.

Asia’s fourth-largest economy shrank by a seasonally adjusted 3.3% in the June quarter from three months earlier, the Bank of Korea said on Thursday. That is the sharpest contraction since the first quarter of 1998 and steeper than a 2.3% contraction seen in a Reuters poll.

“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.”

Gross domestic product fell 2.9% in year-on-year terms, the biggest fall since the fourth quarter of 1998 and also worse than a 2.0% decline seen in the poll.

Exports, which account for nearly 40% of the economy, were the biggest drag on growth, dropping by 16.6% on-quarter to mark the worst reading since 1963.

Construction investment fell 1.3% quarter-on-quarter, while capital investment declined 2.9%.

Output from manufacturing and service sector fell by 9.0%, and 1.1%, respectively.

One saving grace has been a 1.4% gain in private consumption from three months earlier, thanks to government cash handouts that boosted spending on restaurants, clothes and leisure activities.

Finance Minister Hong Nam-ki said the economy is likely to rebound from the third quarter.

“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,” Hong said at a policy meeting on Thursday.

The government has rolled out about 277 trillion won ($231 billion) worth of stimulus to fight the economic fallout from the pandemic so far. However, policymakers have little control over the global demand for the country’s exports, which includes everything from memory chips to cars to petrochemical products.

“The worst seems to be over. The base effect and (fiscal injection) from supplementary budget will improve investment,” said Park Sang-hyun, an analyst at HI Investment & Securities.

For the whole of 2020, analysts see the economy declining by a median 0.4%, which would be the first and largest contraction since 1998. But the International Monetary Fund estimates an even bigger 2.1% contraction.

Last week, the BOK’s governor said a downward revision from its previous projection of a 0.2% decline for 2020 was inevitable.

(Reporting by Joori Roh; Editing by Sam Holmes)

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