S. Korea suffers falling potential growth

South Korea's potential economic growth rate is estimated to have fallen to the 3-percent range on its economic slowdown stemming from the eurozone debt crisis and population aging, economists said Thursday.

The country's potential growth rate, or the maximum possible rate at which an economy can grow without triggering inflation, had remained in the range of 4.5-5 percent between 1998 and 2007, according to estimates by private think tanks.

South Korea's central bank has not officially announced the potential growth rate since 2005, but the Bank of Korea (BOK) said Korea's potential growth rate is estimated to stand in the upper range of 3 percent or near 4 percent.

"If an economic slowdown is protracted, denting facility investment, the underlying trend of the potential growth rate could fall," said an official at the BOK.

Analysts said the global financial crisis and the eurozone debt woes have led Korea's potential growth rate to decline to the 3-percent range, spawning concerns about the economic momentum.

"The potential growth rate is estimated to reach around 3.8 percent for now although we saw the rate reach an estimated 4 percent only six months earlier," said Yim Hee-jung, a senior economist at the Hyundai Economic Research Institute.

Yim projected that the potential economic rate had stayed at around 4.7 percent right after the 1997-98 Asian financial crisis.

A potential economic growth rate is highly affected by the structural changes in population and facility investment, gauges of labor and capital stocks.

The estimate came as Korea's quarterly growth rate more than halved to 0.3 percent in the second quarter on faltering exports and sluggish domestic demand. The full-year growth is widely expected to reach in the 2-percent range, down from 3.6 percent tallied for last year. More analysts bet on another rate cut by the BOK to 2.75 percent for September.

Korea's population growth is slowing down and the number of economically viable people aged 15-64 reached 35.64 million as of July after peaking at 39.6 million in 2008, according to data by the state-run statistics agency.

The country's fertility rate reached 1.24 last year, lower than an average birth rate of 1.74 among members of the Organization for Economic Cooperation and Development.

Facility investment has showed weak performance as companies were reluctant to spend big amid heightened economic uncertainty.

The finance ministry said in a report that if facility investment remains sluggish, the economic recovery is likely to be delayed, raising chances that growth potential would be hurt.

In the second quarter, corporate capital investment contracted

7 percent on-quarter, a turnaround from 10.3 percent on-quarter expansion in the first quarter.

Some raised concerns that if the current trends go on, Korea's potential growth is feared to fall as low as to the 1-percent range someday.

But others claimed that the global financial crisis may not have given meaningful downward pressure on the potential growth rate and the rate cannot sharply fall to a worrying level as the government would not stand idle.

The BOK official said that the potential growth may fall to the 1-percent range in theory if the trend of low growth continues and the population ages.

"But inflows of immigrants and a set of the government's policies could prevent the potential growth rate from sharply declining." (Yonhap News)