A forecast suggests that South Korea’s potential growth rate will fall below 2 percent for the first time this year and is expected to further decrease to 1.7 percent next year. The factors contributing to the decline in growth rate include issues related to low birth rates, an aging population, and underwhelming progress in structural reforms. Unless there is a surge in economic activity, such as inflation, next year, the country is predicted to exhibit a potential growth rate lower than that of the United States for the first time in 24 years.
According to data presented to Representative Kang Joon-hyun, a member of the National Assembly’s Strategy and Finance Committee, by the Bank of Korea on Oct. 23, in a document titled “Gross Domestic Product (GDP) Gap Status by Year for South Korea and Major Countries Over the Last 20 Years,” the Organization for Economic Cooperation and Development (OECD) estimated South Korea’s potential growth rate for this year and next year at 1.9 percent and 1.7 percent, respectively, back in June.
Potential GDP represents the maximum level of production a country can achieve by utilizing all its production factors, including labor, capital, and resources, without causing inflation. The rate at which potential GDP grows is referred to as the potential growth rate.
According to an OECD report, South Korea’s potential growth rate has been consistently declining for 12 years until 2024 since 2013 when it was at 3.5 percent. This year, it is projected to fall below 2 percent for the first time, and it is expected to remain in the mid to late 1 percent range next year.
The potential growth rates for major G7 countries for this year are as follows: the United States at 1.8 percent, Canada at 1.6 percent, the United Kingdom at 1.2 percent, France at 1.1 percent, Germany at 0.8 percent, Italy at 0.8 percent, and Japan at 0.3 percent. Next year, South Korea’s potential growth rate is expected to be even lower than that of the United States, one of the G7 countries. This marks the first time this has occurred in OECD estimated statistics over the past 24 years since 2001. In addition, when comparing the recent years to 2020, the United States has seen its potential growth rate increase from 1.8 percent in 2020 to 1.9 percent in 2024, while Canada’s potential growth rate has risen from 1.1 percent to 1.6 percent. Italy has experienced growth from 0.3 percent to 0.8 percent, and the United Kingdom, which was at -1.3 percent in 2020, is now expected to reach 1.2 percent. It is suggested that in the coming years, South Korea’s potential growth rate may be lower than not only the United States but also other G7 countries.
With South Korea’s potential GDP growth rate expected to decrease, the real GDP has been consistently lower than the potential GDP for several years. An IMF report also estimates that South Korea’s GDP gap rate will remain in negative territory for a substantial 13-year period, from 2012 when it was -0.4 percent, and it is expected to continue in the negative range until 2024 when it is projected to be -0.5 percent. The GDP gap rate is an indicator that shows the extent to which real GDP at the current point compares to potential GDP. It is calculated as the percentage obtained by dividing the difference between real GDP and potential GDP by potential GDP. When the GDP gap rate is negative, it indicates that real GDP is below potential GDP.
As a result, there are concerns about prolonged long-term economic stagnation, similar to Japan, due to the declining potential GDP growth rate. The rapid decrease in the working-age population, coupled with low birth rates and an aging population, presents a significant challenge. Without significant investments and innovation to address these issues, there is a substantial risk of prolonged economic stagnation.