The MERS outbreak is taking a huge toll on the Korean economy

Panicked people are avoiding public areas during the MERS outbreak in South Korea — and that’s already affecting the country’s economy.

“According to the Ministry of Strategy and Finance, department store sales plunged 17% y/y in the first week of June. Data on the number of people going to the movies, amusement parks, baseball games and museums also recorded large slumps, ranging from 38% to 82% y/y, during the same period,” according to Capital Economics’ Krystal Tan.

Further, 100,000 foreign travellers have canceled trips to Korea since the beginning of June. Government officials said “tourist arrivals in the first 11 days of the month have fallen by 25% y/y,” Tan said.

MERS hit Korea in late May. Since then, over 150 cases of infection have been confirmed — 19 have died and 5,200 people are quarantined.

The virus has spread quickly, which has caused widespread alarm.

On Sunday, a team of WHO experts who visited Seoul warned that the outbreak was “large and complex” and that more cases were expected. The team noted it had found no evidence of transmission of the virus “in communities outside hospitals,” but that hasn’t stopped people from shunning public spaces.

“The best-case scenario would be for no new infections to emerge outside of the current quarantined group. [Then] the negative impact on consumption would be concentrated in June, and using department store sales in the first week as a proxy for the month, the decline in private consumption could knock about 0.1% off Korea’s 2015 GDP growth,” according to Tan.

“The impact of tourism would probably last longer. … Assuming tourist arrivals to Korea take a similar length of time to recover [as in Hong Kong after SARS], we estimate the loss in revenue would reduce 2015 GDP growth by another 0.1%.”

And things could be even worse for the Korean economy if there’s long-lasting media coverage of the outbreak, Morgan Stanley’s Sharon Lam noted last week.

“We are concerned that negative news headlines could remain for a while, even if the disease dies down, and that could take a toll on consumer sentiment,” writes Lam. “Indeed, we observed a similar disruptive pattern in May last year, following the Sewol ferry tragedy.”

“If consumer sentiment is hurt substantially again, we are worried that it could kill the recovery momentum and that the economy could get into a vicious downward cycle.”

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