While robust semiconductor exports are fueling expectations of an economic recovery, a forecast has emerged that Korea's potential growth rate, the fundamental strength of its economy, will fall below 1.5% for the first time on record.
According to the Organization for Economic Cooperation and Development's (OECD) June forecast released Friday, Korea's potential growth rate is projected to decline from 1.85% last year to 1.66% this year and 1.52% next year. In particular, it is expected to fall to 1.46% in the fourth quarter of next year, dropping below 1.5% for the first time since the OECD began compiling related statistics. The potential growth rate refers to the level of growth that can be achieved by fully utilizing production factors such as labor, capital, and productivity without triggering inflation.
Korea's potential growth rate has been declining steadily since recording 3.62% in 2012. After falling below 3% for the first time in 2016, it dropped below the 2% level last year.
Experts cite the shrinking labor force due to an aging population, slowing investment, and stagnant productivity as the key factors behind the decline in the potential growth rate. The analysis suggests that as low birth rates and population aging deepen while productivity improvements remain sluggish, the economy's capacity for growth is weakening further.
What stands out is that the OECD significantly raised its growth forecast while actually lowering its potential growth rate projection. The OECD recently raised its growth forecast for Korea this year by 0.9 percentage point, from 1.7% to 2.6%. By contrast, it lowered its potential growth rate projections by 0.05 percentage point each, from the 1.71% for this year and 1.57% for next year it had forecast late last year. This is interpreted to mean that while the semiconductor boom is lifting short-term growth, it is not improving the economy's structural growth potential.
Some view expanded artificial intelligence (AI) investment as a potential catalyst for a rebound in the potential growth rate. However, because semiconductors account for only around 30% of total facility investment, there are limits to how much the semiconductor industry alone can raise the economy's overall growth potential, observers note.
Experts agree that productivity-focused structural reforms, including labor market reform, deregulation, and strengthening the competitiveness of the service industry, are needed to revive the potential growth rate. A former senior government official said, "The potential growth rate is not an area that can be raised through monetary policy such as interest rate adjustments." He added, "The key is to improve fiscal efficiency and create a virtuous cycle in which the excess profits generated by AI proliferation lead to research and development (R&D) and facility investment, rather than ending up as one-time distributions."
