Korea's potential growth rate, a key indicator of the economy's fundamental strength, is projected to fall to the 1.5 percent range next year, according to the Organisation for Economic Co-operation and Development (OECD). The grim forecast shows that the maximum growth rate the Korean economy can achieve without triggering inflationary side effects will plunge sharply from 1.92 percent last year to 1.71 percent this year and 1.57 percent next year. This figure falls well below the Bank of Korea's estimate of 1.8 percent for the 2025-2029 potential growth rate. The OECD projected that even after the potential growth rate drops to 1.52 percent in the fourth quarter of next year, a gradual decline will continue. If the OECD's forecast holds, Korea's economy has been steadily depleting its growth capacity since recording a potential growth rate of 3.63 percent in 2012.
The OECD's outlook amounts to a painful warning that, despite a surprise growth rate of 1.7 percent in the first quarter of this year, the Korean economy has failed to resolve the structural vulnerabilities obscured by a "semiconductor illusion." Buoyed by the semiconductor super cycle, expectations for the Korean economy have risen sharply this year. Global investment bank JPMorgan even raised its growth forecast for this year from 2.2 percent to 3.0 percent. But stripped of the semiconductor effect, the true strength of the Korean economy is meager. Excluding semiconductors, the growth rate is cut in half. Unless the lopsided growth structure concentrated in a single industry is resolved, it will be difficult to avoid economic shocks stemming from swings in the semiconductor cycle. The possibility cannot be ruled out that Korea will follow the path of Finland, which fell into a severe recession after the collapse of Nokia, which had once accounted for a quarter of the country's economic growth.
Lifting the country's falling growth potential requires overhauling outdated economic structures and cultivating new growth engines. President Lee Jae-myung has also emphasized six major structural reforms in regulation, finance, the public sector, pensions, education and labor, saying, "Korea's most pressing task is rebounding the potential growth rate." But months after Lee declared this year the "inaugural year for rebounding the potential growth rate," the implementation of reforms has been sluggish. Slogans alone cannot revive a flagging economy. To identify core industries that can succeed semiconductors and to expand growth capacity through innovation, investment and productivity gains, regulatory overhaul, greater labor flexibility and reform of the education system can no longer be postponed. Now, when the semiconductor boom has bought time, is precisely when bold structural reforms must accelerate.
