BOK "Concerns Over Accelerated Decline in Potential Growth Rate After COVID-19"

Bank of Korea Report on 'Post-COVID-19 Economic Structural Changes and Their Impact on Our Economy'
"ICT-Centered Digital Economy Transition · Biohealth Investment as Productivity Improvement Opportunities"

[Asia Economy Reporter Kim Eun-byeol] Concerns have been raised that the potential growth rate, which represents the fundamental strength of our economy, could decline more rapidly due to the impact of the novel coronavirus infection (COVID-19). To prevent the decline in the potential growth rate, investments that can enhance productivity, such as the transition to a digital economy centered on ICT and investment in the biohealth industry, are necessary.

According to the Bank of Korea's report released on the 29th titled 'Changes in Economic Structure after COVID-19 and Its Impact on Our Economy,' Korea's potential growth rate is expected to face downward pressure due to changes in industrial and labor structures and the slowdown in global trade following COVID-19.

The potential growth rate refers to the growth rate that can be achieved by maximizing the use of labor and capital without increasing the inflation rate. It is determined by labor input, capital input, and the growth rate of total factor productivity. Due to the low birthrate trend and changes in industrial structure, overall labor input is slowing down, and with the contraction of global trade, the contribution of capital to growth is also expected to decline, intensifying the downward pressure on the potential growth rate.

Korea's potential growth rate maintained a level close to 10% annually during the high-growth period of the 1970s and 1980s but began to decline from the 1990s, recording the high 6% range just before the 1997 Asian financial crisis. It then showed a level of 4-5% before the global financial crisis (2001-2005), but after the financial crisis, from 2009 to 2019, prolonged investment stagnation resulted in an average annual rate in the low 3% range. Last year, the Bank of Korea estimated the potential growth rate for 2019-2020 at around 2.5%. The Organisation for Economic Co-operation and Development (OECD) also estimated Korea's potential growth rate at 2.5% earlier this year.

A Bank of Korea official stated, "Even after overcoming the impact of the COVID-19 crisis, it is unlikely that households, companies, and the government will return to their previous forms," adding, "Investments for the transition to a digital economy centered on ICT and the development of the biohealth industry are expected to be opportunities for productivity improvement that can offset the downward pressure on the potential growth rate."

They also emphasized, "If productivity in the digital economy and biohealth industry sectors improves, the ripple effects will spread throughout the economy, helping to break free from productivity stagnation." This indirectly refers to the possibility that the government's KRW 76 trillion 'Korean New Deal' project, if properly implemented, could be an opportunity to raise Korea's potential growth rate in the post-COVID era.

After COVID-19, Korea's inflation is expected to continue a low-inflation trend as households and companies increase savings rather than investment and consumption, and as the digital economy accelerates. The acceleration of the digital economy, including automation and unmanned systems, is also a factor that lowers trend inflation.

However, the Bank of Korea added that since major countries have implemented expansionary monetary and fiscal policies due to the COVID-19 situation, the sharply increased liquidity could act as an inflationary pressure in the future. The weakening of the global value chain (GVC), which has increased production costs and expanded inefficiencies in resource allocation, was also cited as a factor that could contribute to inflationary pressure.

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