Economic Fundamentals Overshadowed by Semiconductor Boom... Potential Growth Rate Expected to Drop to Mid-1% Range Next Year

by Jo Youjin

Published 26 Apr.2026 19:39(KST)

Although South Korea's gross domestic product (GDP) growth rate in the first quarter of this year delivered a surprising performance, projections indicate that the potential growth rate, which reflects the economy's fundamental strength, could fall to the 1.5% range next year. While the country is currently benefiting from a semiconductor boom cycle, analysts point out that the underlying economic fundamentals remain weak and structural limitations persist.

According to the latest data from the Organisation for Economic Co-operation and Development (OECD) released on April 26, South Korea's potential growth rate is estimated to decline from 1.92% last year to 1.71% this year, representing a drop of 0.21 percentage points. It is projected to fall further to 1.57% next year, a decrease of 0.14 percentage points. This would mark an all-time low.

Yonhap News Agency

The potential growth rate refers to the rate at which potential GDP increases. Potential GDP is the maximum output an economy can achieve by fully utilizing all production factors-such as labor, capital, and resources-without triggering inflation. Based on the OECD’s latest estimates, South Korea’s potential growth rate has been on a continuous decline since 2012, when it stood at 3.63%. After dropping below 2% last year, it has yet to show signs of a rebound. If this trend continues through next year, it will mark 15 consecutive years of decline.

The downward trend in South Korea’s potential growth rate is seen as the result of several factors: a decrease in labor and capital inputs due to low birth rates and population aging, as well as a slowdown in total factor productivity, which is a key driver of productivity growth. All major components contributing to potential growth are reportedly underperforming.

Jungwoo Park, an economist at Nomura Securities, pointed to several causes for the falling potential growth rate: a shrinking labor supply due to an aging population, weakening profitability in manufacturing sectors other than semiconductors, and reduced capital accumulation stemming from a decline in construction investment. He further noted that "the lagging productivity in the domestic service sector is contributing to an overall decline in potential growth across all sectors," expressing concern that "the downward trend could accelerate going forward."

Experts observe that, given South Korea's current situation, immediate improvement in population structure is not feasible. Therefore, it is essential to focus available resources on capital accumulation and boosting total factor productivity. They recommend laying the groundwork for a rebound in the potential growth rate by discovering a new leading industry to follow semiconductors, strengthening the competitiveness of the service sector, and pushing forward with regulatory reforms.

Gwangseok Kim, head of economic research at the Korea Economic and Industrial Research Institute, commented, "The semiconductor industry can serve as a catalyst to raise the potential growth rate through capital investment, but the problem is that we cannot guarantee how long the boom will last." He added, "If we assume that, in addition to the Middle East conflict, the exchange rate moves toward a more stable, downward trajectory, it is difficult to presume that semiconductors alone will lift the potential growth rate."

He went on to say, "We need to foster at least one more key industry, in addition to semiconductors, that can drive remarkable growth by boosting labor and capital inputs and raising productivity. The defense industry could be such an example." He further advised, "It is also important to nurture skilled professionals in fields such as artificial intelligence (AI), in order to enhance productivity and mitigate the decline in labor input."