"COVID-19 Accelerates Decline in Potential Growth Rate, Employment Recovery Takes 2-4 Years (Comprehensive)"

BOK "Post-COVID-19 Economic Structure Changes and Impacts" Report

Increase Productivity through Digital Economy and Biohealth Investments
In Crisis Like Foreign Exchange Crisis, 960,000 Monthly Job Losses, Employment Recovery Takes About 4 Years

[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 a digital economy centered on ICT and the biohealth industry, are necessary. The Bank of Korea recognizes the need for a potential growth rate that reflects the COVID-19 situation and is currently reviewing whether to adjust the potential growth rate.

According to the 'Economic Structural Changes and Their Impact on Our Economy After COVID-19' report released by the Bank of Korea on the 29th, South 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 achievable 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.

South 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 foreign exchange crisis. Before the global financial crisis (2001?2005), it was around 4?5%, but after the financial crisis, from 2009 to 2019, prolonged investment sluggishness 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%.

A Bank of Korea official stated, "Even after escaping the impact of COVID-19, it is unlikely that households, companies, and governments will return to their previous forms," adding, "Investments for transitioning to a digital economy centered on ICT and fostering the biohealth industry are expected to serve as opportunities to offset downward pressure on the potential growth rate and improve productivity." This indirectly suggests that if the government's 76 trillion won-scale 'Korean New Deal' project is properly implemented, it could be an opportunity to raise South Korea's potential growth rate in the post-COVID era.

The Bank of Korea also anticipated that it would take considerable time for employment shocks arising from the economic restructuring process to recover. It explained that it would take 2 to 4 years for the employment rate to return to pre-crisis levels. Assuming an employment shock at the level of the foreign exchange crisis, nearly 965,000 workers could lose their jobs monthly. As demand for jobs suitable for the new economic structures such as the digital economy increases, existing jobs are expected to decrease, with the impact concentrated on vulnerable groups, adversely affecting income distribution.

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