[Exclusive] OECD "South Korea's Potential Growth Rate at 2.33% This Year, Lowest Ever"

Estimated 0.11%P Decline from 2.44% in 2020
Declining Working-Age Population and Slowing Total Factor Productivity Due to Low Birthrate and Aging
Possibility of Long-Term Low Growth Even After COVID-19 Shock Subsides

[Asia Economy Reporter Kim Eun-byeol] The Organisation for Economic Co-operation and Development (OECD) has estimated that South Korea's potential growth rate, which indicates the fundamental strength of the economy, will once again hit a record low this year. As the decline in the potential growth rate accelerates, there are expectations that it will soon enter the 1% range.

According to the OECD on the 22nd, South Korea's potential growth rate this year is estimated to be 2.33%, down 0.11 percentage points from 2.44% last year. The potential growth rate represents the maximum growth rate achievable by efficiently utilizing labor and production facilities without overheating the economy, serving as an indicator of the economy's fundamental strength. The OECD also released potential growth rate estimates in its World Economic Outlook for 2020?2022 last month. ▷Related article page 3

South Korea's potential growth rate was around 8?9% until the early 1980s and 1990s but sharply dropped to 5.69% after experiencing the International Monetary Fund (IMF) foreign exchange crisis in 1998. After the 2009 financial crisis, the potential growth rate fell to 3.78%, entering the 3% range for the first time, and in 2018, it recorded 2.87%, entering the 2% range.

As the potential growth rate declines, there are forecasts that entering the 1% range is also within sight. It took nine years to fall from the 3% range to the 2% range, but with the potential growth rate expected to drop to 2.26% next year, lower than this year, there is speculation that the time it takes to fall into the 1% range will be shorter.

The rapid decline in South Korea's potential growth rate is attributed to a decrease in the working-age population due to low birth rates and aging, as well as a decline in total factor productivity (a measure of production efficiency that reflects not only labor productivity but also work ability, capital investment, and technology). In particular, the low birth rate trend among the youth is expected to strengthen further due to the impact of the COVID-19 pandemic, and there are growing concerns as there are no sharp measures to improve productivity.

If this trend continues, the global economy may recover, but South Korea could fall into long-term low growth. Even if the government and the Bank of Korea stimulate the economy, if the potential growth rate remains low, it will no longer be possible to sustain past growth rates. Japan, which had been experiencing growth in the 0% range even before the COVID-19 crisis, is a representative example. Kim Kyung-soo, honorary professor at Sungkyunkwan University, said, "Structural factors that lower the potential growth rate have already emerged, and now we are in the process of confirming them. Citizens worried about falling into a low-growth trend are not having children, resulting in a vicious cycle where the economy's fundamental strength weakens further." He advised, "While increasing investment in high value-added industries is good, it seems necessary to change structural aspects through a big picture approach such as labor reform."

Meanwhile, the Bank of Korea estimated South Korea's potential growth rate at 2.5% in 2019, and it is currently re-estimating the potential growth rate considering the impact of the COVID-19 pandemic and changes in the industrial structure. Bank of Korea Governor Lee Ju-yeol stated at last year's comprehensive audit that South Korea's potential growth rate is likely lower than the previous estimate of 2.5%. He said, "Considering the actual growth rate has declined, the potential growth rate is likely lower than before, but it is difficult to conclude that it has fallen to the 1% range now, and we will officially estimate it."