OECD Lowers South Korea's Potential Growth Rate to 2.5% This Year

Down 0.2%P from Last Year
Further Decline Expected to 2.4% Next Year
Widening Negative GDP Gap Rate... Deflation Concerns
Decline in Working-Age Population, Slowing Productivity Growth Are Causes

[Asia Economy Reporter Kim Eun-byeol] This year’s potential growth rate, the fundamental strength of South Korea’s economy, has been revealed to be 2.5%, down 0.2 percentage points from last year. The potential growth rate refers to the maximum growth rate achievable by efficiently utilizing labor and production facilities without overheating the economy. It represents a country’s maximum growth capacity and is used as an indicator of the economy’s fundamental strength.

According to statistics from the Organisation for Economic Co-operation and Development (OECD) on the 28th, South Korea’s potential growth rate this year is 2.5%, down from 2.7% last year. The OECD estimated the potential growth rate through the economic outlook announced in November last year. In May last year, the OECD had projected South Korea’s 2020 potential growth rate at 2.6%, but it was revised downward by 0.1 percentage points in just six months. Next year, South Korea’s potential growth rate is expected to fall further to 2.4%. This means that the OECD’s estimated potential growth rate for South Korea has been declining year by year.

The decline in South Korea’s potential growth rate is also notable compared to other OECD countries. The 2021 potential growth rate fell by 0.7 percentage points compared to 2017, when South Korea’s economy peaked at a potential growth rate of 3.1%. This is the third largest drop among the 35 OECD member countries, excluding Turkey. Only Ireland (-3.0 percentage points) and Iceland (-0.9 percentage points) experienced a larger decline than South Korea. Compared to 2019, only three countries?Turkey (4.4% → 4.0%), Ireland (4.0% → 3.4%), and Iceland (2.9% → 2.5%)?have seen their potential growth rates decline faster than South Korea’s this year.

South Korea’s potential growth rate was 7.1% in 1997 but sharply dropped to 5.6% in 1998 following the foreign exchange crisis. In 2009, amid the financial crisis, it fell into the 3% range for the first time (3.8%), and by 2018 it had declined to 2.9%. The time it takes to fall from the 2% range to the 1% range is likely to shorten further.

A more serious problem is the economic growth rate falling far below the potential growth rate. The gap between the gross domestic product (GDP) growth rate and the potential growth rate is severe even among OECD member countries. According to OECD estimates, the GDP gap rate?which indicates the difference between the potential growth rate and the real growth rate?was -2.06% in 2019, -2.28% this year, and is expected to widen to -2.37% next year. The lower the real growth rate is compared to the potential growth rate, the lower the GDP gap rate becomes. This leads to a slowdown in economic activity and raises concerns about deflation (a sustained decline in prices linked to economic recession).

The rapid decline in South Korea’s potential growth rate is attributed to a decrease in the working-age population and a slowdown in productivity growth. The working-age population aged 15 to 64 began to decline by 0.3% in 2017 and is expected to continue decreasing. The total factor productivity growth rate has fallen, slowing the pace of innovation in the economy. Jo Young-moo, a research fellow at LG Economic Research Institute, said, “In the past, improvements in total factor productivity somewhat offset the effects of low birth rates and aging, but now productivity itself is declining, causing the potential growth rate to fall more rapidly.”

This content was produced with the assistance of AI translation services.