OECD projects Korea’s potential growth drops to 1.57% next year, a record low after falling below 2% in 2024
Korea’s Potential Growth Rate Seen Falling to the 1.5% Range Next Year… “Structural Reforms Must Be Sped Up”(Businesskorea DB)
A projection has emerged that Korea’s potential growth rate will fall to the 1.5% range next year. After dropping below 2% for the first time last year, it is expected to decline to the mid-1% range in just two years. While optimism has surfaced about the annual growth rate on the back of “surprise growth” tied to a semiconductor super-cycle in the first quarter of this year, analysis suggests Korea’s structural constraints remain intact.
Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol said, “The potential growth rate is not fixed,” adding that the government would seek to create momentum for a rebound through a major transformation driven by artificial intelligence (AI), among other measures.
According to the latest data from the Organisation for Economic Co-operation and Development (OECD) released on the 26th, Korea’s potential growth rate is estimated to fall by 0.21 percentage points, from 1.92% last year to 1.71% this year. Next year’s potential growth rate is projected at 1.57%, a further decline of 0.14 percentage points. This would be the lowest level on record.
The potential growth rate refers to the growth rate of potential gross domestic product (GDP). Potential GDP is the maximum production capacity a country can achieve without triggering inflation when mobilising all production factors—labour, capital, and resources—and it is used as an indicator to assess a country’s growth potential. Potential growth rates generally tend to be lower in advanced economies with already high economic levels.
The problem for Korea is that there is no sign at all of a rebound in its potential growth rate. According to OECD estimates, Korea’s annual potential growth rate rose by 0.01 percentage points from 3.74% in 2010 to 3.75% in 2011, but has been declining for more than a decade since 2012 (3.63%). From last year, it fell below 2%.
It is particularly painful that Korea’s potential growth rate is falling below that of the United States, the world’s No. 1 economy and more than ten times larger than Korea’s in economic scale. After the United States surpassed Korea’s potential growth rate for the first time in 2023, it is projected to outpace Korea for five consecutive years. The gap in potential growth rates between the two countries is expected to widen from 0.03 percentage points in 2023 to 0.28 percentage points in 2025, 0.32 percentage points this year, and 0.38 percentage points next year.
Domestic institutions are also forecasting that a rebound in Korea’s potential growth rate will not be easy. The Bank of Korea projected that Korea’s potential growth rate, which stood at around 2.1% in 2021~2023, will gradually decline to 1.8% in 2025~2029 and 1.3% in 2030~2034. As Korea’s economy grew 1.7% quarter-on-quarter in the first quarter of this year, expectations have risen that annual growth in the 2% range could be achieved; however, the implication is that short-term “surprise growth” alone makes it difficult to halt the structural weakening of potential.
Concerns are also being raised that Korea’s real GDP will continue to fall short of potential GDP. According to the latest data from the International Monetary Fund (IMF), Korea’s GDP gap rate—calculated as real GDP minus potential GDP—is estimated at -0.9% this year and -0.63% next year. This means that a sluggish economic condition would persist in which actual output remains below the level achievable when fully utilising all of a country’s production factors.
Experts cite declining labour supply due to population ageing, deteriorating profitability in manufacturing industries other than semiconductors, and regulatory easing that lags behind advanced economies as factors behind the fall in the potential growth rate. They point out that Korea must hurry to discover new flagship industries and push ahead with structural reforms.
Yang Jun-seok, a professor in the Department of Economics at The Catholic University of Korea, said, “If the war continues under a potential growth rate like the current one and semiconductor exports take a hit, the growth rate will not even reach 1%,” adding, “We must attract capital by fostering other flagship industries and strengthen competitiveness through bold structural reforms in areas such as education, services, and finance.”
The government has also set a policy direction to accelerate efforts to improve the fundamentals of the Korean economy. In a post on X (formerly Twitter) that day, Deputy Prime Minister Koo said, “The potential growth rate can change as much as needed depending on changes in the
Jung Min-hee
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