South Korea’s potential growth rate is forecast to stay at 2 percent for two years in a row, painting a gloomy picture of the country’s economic health and illustrating the need to address weak growth momentum.
The OECD projects Korea’s potential growth rate to stand at 2 percent this year, according to data submitted by the Finance Ministry to the National Assembly.
Over the past five years, Korea’s potential growth rate has been declining. In 2020 and 2021, the figure was 2.4 percent. But it fell to 2.3 percent in 2022 and then dropped to 2 percent last year.
The potential growth rate refers to the rate at which an economy can grow over the long term without triggering inflation. It shows the highest sustainable level of economic growth that an economy can achieve, a point that is deemed important by economic policymakers.
In general, much bigger economies with higher income levels tend to post relatively lower potential growth. Up until recently, Korea’s potential growth rate mostly outpaced those of advanced economies. But things have changed.
A striking example is the United States. Helped by advances in the tech sector and the concentration of top talent there, its potential growth rate, which was 1.9 percent in 2020 and 2021, rose to 2 percent in 2022 and then edged up to 2.1 percent last year. The figure is projected to remain at 2.1 percent for 2024 -- higher than Korea’s 2 percent.
It came as a shock for some economists here since the potential growth rate of the US has been higher than that of Korea for two consecutive years. Korea’s growth rate still remains higher than that other big economies except for the US, but it should be noted that major economies are also shifting to upward trajectories. For instance, Germany saw its potential growth rate shoot up from 0.7 percent in 2020 to 0.8 percent for 2024. Britain’s potential growth rate is forecast to 1.1 percent for this year, down from 1.2 percent last year but up from 0.9 percent in 2020.
Notable is the growth potential of the US economy. Experts say that the US continues to boost overall productivity thanks in part to the explosive growth of innovative AI and big data industries. The US also takes full advantage of the concentration of skilled, highly educated workers there, while investing heavily in R&D and innovation.
However, other major economies are experiencing upward trajectories, indicating that Korea's growth could decline significantly in the near future without decisive policy interventions.
Local economic institutions forecast that Korea’s potential growth rate will continue to decline in the coming years unless the government takes drastic measures to address fundamental problems, such as the shrinking working-age population.
Acorrding to data from Statistics Korea, the share of Korea’s working-age population -- those aged 15-64 -- is forecast to fall from 71.1 percent in 2022 to 45.8 percent in 2072. The demographic change will be sweeping until the 2030s, a period when the baby boomers born in 1955-1963 join the senior citizen age group.
In addition to Korea’s low birth rate and rapid aging, the country’s economy is slow to shift toward new industries due in part to the complex regulations and rules that hinder the implementation of innovative business ideas.
Some experts call on the government to reform the labor market saddled with rigid regulations and penalties for corporations, but this is a tricky problem that cannot be addressed in a short period of time, especially at a time when workers still confront unstable future in terms of welfare and income sources after retirement.
There is no doubt that Korea needs structural reform initiatives to shore up the sagging potential economic growth rate. To that end, the government should make concerted efforts to remove outdated regulations and improve investment conditions for growth-oriented businesses.
