South Korea’s Potential Growth Rate to Rise for Two Straight Years for First Time in 40 Years, IMF Says, Amid Semiconductor Mirage Risk

IMF Sees 2.14% This Year, 2.20% Next Year

First Back-to-Back Gain Since the Three-Lows Boom

Chip Concentration Deepens Broader Low-Growth Concerns

The International Monetary Fund projects South Korea’s potential growth rate will rise for two straight years this year and next for the first time in four decades. But there is also a warning that the rate could fall again if growth remains concentrated in semiconductors and does not translate into productivity gains across the broader economy.

According to the IMF’s October World Economic Outlook report, South Korea’s potential growth rate is estimated to rise to 2.14% this year and 2.20% next year from 1.94% last year. That would mark a return to the 2% range after the measure fell from 2.06% in 2023 to 1.96% in 2024. Potential growth refers to the pace an economy can sustain without fueling inflation and is a measure of its underlying strength. The figure was calculated based on the IMF’s forecasts for South Korea’s real gross domestic product growth and output gap, which shows how far actual GDP is above or below potential GDP.

The rate posted one-year rebounds in 2010 and 2021 during recoveries from the global financial crisis and the Covid-19 pandemic. But this is the first two-year rise since 1986-1987, during the so-called three-lows boom driven by low oil prices, low interest rates and a weak dollar.

Potential growth, which depends on labor and capital inputs as well as productivity, had been on a long decline because of population aging and a shrinking labor supply. The latest increase is seen as reflecting stronger capital investment tied to the semiconductor boom and expectations that the spread of artificial intelligence will boost productivity.

Expectations are also growing that the semiconductor boom underpinning potential growth will continue into next year. Lee Hyung-il, deputy prime minister and finance minister, told CNBC on October 17 that the boom would last into next year because the gap between semiconductor demand and supply remains very large.

Still, some experts say the rebound may be only a temporary mirage created by the chip boom. Calls are also growing for South Korea to use the semiconductor rally as an opportunity to raise the economy’s broader growth potential. Kim Mi-ru, a research fellow in the macroeconomics and financial policy division at the Korea Development Institute, recently warned that South Korea’s potential growth rate could fall into the 0% range in the 2040s if the economy fails to reverse its long-running downward trend.

Kim Ik-hwan, Hankyung.com reporter lovepen@hankyung.com