(Yonhap)
South Korea’s potential growth rate, a key measure of its economic fundamentals, is projected to fall to the mid-1 percent range next year, raising concerns about a prolonged period of low growth despite a stronger-than-expected first-quarter performance.
According to the OECD on Sunday, South Korea’s potential growth rate is expected to decline from 1.92 percent last year to 1.71 percent this year, before falling further to 1.57 percent next year. The figure has been on a steady downward trend for 15 years since peaking at 3.63 percent in 2012.
Potential growth refers to the maximum rate at which an economy can grow without triggering inflation, assuming full utilization of labor and capital. A prolonged decline in this indicator signals weakening economic fundamentals. The OECD’s estimate is lower than that of the Bank of Korea, which projects potential growth at around 1.8 percent for 2025–2029, suggesting a less optimistic external view of the Korean economy.
Structural factors such as demographic decline and stagnant productivity are driving the downward trend. The working-age population has been shrinking since 2021, while productivity gains driven by artificial intelligence have yet to materialize in a meaningful way. The Bank of Korea has also warned that the current semiconductor-driven growth cycle may be limited to the first half of next year, raising concerns that a slowdown in AI cloud demand could weaken exports and drag down the broader economy.
Calls are growing for new growth engines to offset a potential downturn in the semiconductor sector. Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol said on social media platform X that the government would foster “ultra-innovative industries” such as defense, bio and K-content as future growth drivers, adding that it plans to unveil a detailed economic growth strategy in June.
However, rising fiscal burdens driven by rapid aging pose a significant challenge. According to the International Monetary Fund, South Korea’s pension spending is projected to increase by 0.7 percent of GDP between 2025 and 2030, the fastest pace among Group of 20 economies, compared with 0.5 percent for the United States, 0.3 percent for Germany and 0.2 percent for Japan. This trend risks creating structural imbalances, with welfare spending rising faster than the economy’s growth capacity.
The government is preparing reforms to the basic pension system, which will cost around 27 trillion won ($18.3 billion) this year. Currently provided to the bottom 70 percent of elderly citizens, the pension system could see significant savings if the statutory retirement age is gradually raised. A recent report by Hongik University’s industry-academia cooperation foundation estimated that raising the retirement age from 65 to 75 by 2056 could reduce pension spending by up to 603 trillion won over about 40 years through 2065.
Meanwhile, the absence of a second semiconductor-level industry and rising fiscal pressures from aging could weigh on the Korean won. According to the Bank of Korea and the Bank for International Settlements, the country’s real effective exchange rate index fell to 85.44 as of end-March, down 1.57 points from a month earlier, marking its lowest level since March 2009.
The real effective exchange rate measures the purchasing power of a country’s currency in global trade. The latest reading marks a 17-year low. The index previously fell to 68.1 during the Asian financial crisis and 78.7 during the global financial crisis.
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