Summary
- The OECD said South Korea’s potential growth rate is projected to fall to the mid-1%% range next year, marking the lowest level on record.
- The IMF estimated South Korea’s GDP gap at -0.90%% this year and -0.63%% next year, indicating that real GDP will remain below potential GDP.
- Experts cited deeper dependence on the semiconductor industry and the possibility of a weaker fiscal base as key risks, and said structural reform and industrial diversification are needed.
Forecast Trend Report by Period
South Korea’s potential growth rate is projected to fall to the mid-1% range next year, hitting a record low. The forecast suggests that while the economy may post a short-term recovery led by semiconductors, its structural growth base is weakening.
OECD estimates showed on April 26 that South Korea’s potential growth rate slowed to 1.92% last year and is expected to ease to 1.71% this year, a decline of 0.21 percentage point, and to 1.57% next year, down another 0.14 point. It is forecast to slip to 1.52% in the fourth quarter of next year, extending an annual run of record lows.
Potential growth is the rate of increase in potential GDP, or the maximum pace of expansion an economy can sustain without stoking inflation. South Korea’s rate has fallen steadily since 3.63% in 2012. It dropped below 2% in 2023 and is set to decline for about 15 straight years through next year.
The gap with the US is also widening. OECD estimates put the spread at 0.03 percentage point in 2023, 0.13 point in 2024, 0.28 point in 2025, 0.31 point this year and 0.38 point next year.
The Bank of Korea has reached a similar conclusion. It has said the country’s potential growth rate will remain below 2% in 2026 and 2027, and could slip into the 1% range over the medium to long term.
The economy is also operating below potential. The International Monetary Fund estimated South Korea’s GDP gap at -0.90% this year and -0.63% next year. That means real GDP remains below potential GDP and production factors are not being fully utilized.
The structure of growth is another concern. Key risks include deeper dependence on the semiconductor industry, greater economy-wide volatility tied to swings in specific sectors and the possibility of a weaker fiscal base.
The policy response centers on structural reform. That includes addressing low birth rates and population aging, improving productivity and diversifying industry at the same time. Policymakers also share a consensus on the need for broad-based reforms across education, housing, balanced regional development, youth employment, pensions and labor. Experts pointed to stronger services-sector competitiveness, wider market competition and greater economies of scale as key conditions for lifting potential growth.
Lee Song-ryeol, Hankyung.com reporter yisr0203@hankyung.com
Korea Economic Daily
hankyung@bloomingbit.ioThe Korea Economic Daily Global is a digital media where latest news on Korean companies, industries, and financial markets.
