[2023 National Audit] "Korea's Potential Growth Rate Below 2% This Year, 1.7% Next Year"

First Time in 24 Years Below G7 Level

There is an analysis that South Korea's potential growth rate will fall below 2% for the first time this year and plunge to 1.7% next year.

This means that due to structural problems such as low birth rates, aging population, and lack of innovation, even if production factors like labor and capital are operated as efficiently as possible, it will be difficult for the economic growth rate to exceed the mid-to-late 1% range unless inflation or economic overheating is tolerated.

According to the data on the "Annual GDP Gap Status of Major Countries Including Korea over the Past 20 Years" submitted by the Bank of Korea to Kang Jun-hyun, a member of the National Assembly's Planning and Finance Committee (Democratic Party), the OECD estimated South Korea's potential growth rate at 1.9% this year and 1.7% next year in June.

The OECD report analyzed that Korea's potential growth rate has been continuously declining for 12 years from 2013 (3.5%) to 2024. In particular, it is expected to fall below 2% for the first time this year and drop to the mid-to-late 1% range next year. This contrasts with the much larger and more mature U.S. economy, whose potential growth rate is projected to be 1.9% next year, higher than Korea's.

The potential growth rates of the Group of Seven (G7) countries this year were in the order of the U.S. (1.8%), Canada (1.6%), the U.K. (1.2%), France (1.1%), Germany (0.8%), Italy (0.8%), and Japan (0.3%).

Next year, there will be no changes in the potential growth rates of other countries, but the U.S. (1.9%) will increase by 0.1 percentage points, and Japan (0.2%) will decrease by 0.1 percentage points.

In 2024, South Korea's potential growth rate (1.7%) will ultimately be lower than that of the U.S. (1.9%), one of the G7 countries.

This is the first time since 2001, according to OECD's 24 years of estimates, that Korea's potential growth rate has fallen below that of the G7 countries.

Concerns are growing that the decline in potential growth rate could solidify a long-term low-growth trend similar to Japan's.

Bank of Korea Governor Lee Chang-yong said earlier on the 12th (local time) during a press conference in Marrakech, Morocco, "Many people believe that Korea's potential growth rate is about 2%, but the general view is that it will gradually decline due to aging."

He added, "It will be difficult for Korea to achieve a growth rate of 3-4%, but since the U.S. is growing at 2%, thinking that Korea will inevitably have 0% growth like Japan is too pessimistic. We want to set a long-term goal of over 2% by reforming how to utilize the labor market, women, and foreign workers."

When the potential growth rate falls, the neutral interest rate generally decreases as well, raising concerns about a divergence between the neutral interest rate trends of major countries like the U.S. and South Korea. The neutral interest rate refers to the theoretical interest rate level at which the supply and demand of funds are balanced with stable prices, without inflation or deflation (a sustained decline in prices).

Governor Lee said on the 19th, right after the Monetary Policy Board meeting, "In the U.S., the economy is strong, so the neutral interest rate is rising, but in Korea, due to 10 to 20 years of population aging, the potential growth rate is falling, and the equilibrium interest rate may also enter a downward phase. Our concern is what changes might occur if the neutral interest rate rises in advanced countries but falls in Korea."

[Image source=Yonhap News]