Potential Growth Rate Expected to Plunge to Low to Mid 1% Range by 2030 if Current Trend Continues

Bank of Korea 'Potential Growth Rate of Our Economy and Future Outlook'
1% Mid-Early Range in 2030, Falling to 0% Range by 2040
"Productivity Improvement Can Raise It by 0.7%P"

If the current trend continues, South Korea's potential growth rate is projected to fall to the low to mid-1% range in the 2030s and could drop to the 0% range in the 2040s. There is a warning that structural reforms across the entire economy are urgently needed to raise the potential growth rate.

According to the report titled "BOK Issue Note, Potential Growth Rate of Our Economy and Future Outlook" released by the Bank of Korea on the 19th, South Korea's potential growth rate is estimated to be around 2% during 2024?2026. The potential growth rate of the Korean economy has trended downward, falling from around 5% in the early 2000s to the low to mid-3% range in the 2010s, and further declining to the mid-2% range during 2016?2020.

This decline is attributed to decreases in the contributions of productivity, labor, and capital, which determine the potential growth rate. The contribution of total factor productivity (TFP) dropped from 2.1 percentage points during 2001?2005 to 0.7 percentage points in 2024?2026. Labor input contribution decreased from 0.7 percentage points to 0.2 percentage points over the same period, and capital input contribution declined from 2.2 percentage points to 1.1 percentage points.

Total factor productivity decreased due to a lack of innovation in the economy and inefficiencies in resource allocation. Labor input decline is analyzed as resulting from structural factors such as the slowdown in the growth of the working-age population, as well as social and institutional changes related to working conditions before and after the COVID-19 pandemic, and shifts in employment shares by gender and age. The slowdown in capital input contribution is interpreted as a result of investment deceleration as the economy enters a mature phase, and structural factors such as population aging slowing the pace of capital accumulation.

If the current trend continues, the potential growth rate is expected to fall to the low to mid-1% range around 2030 and to the 0% range in the 2040s. Estimating the five-year average of annual change rates, the potential growth rate is projected to decline to 1.8% during 2025?2029, then continue to decrease steadily to 0.7% during 2040?2044 and 0.6% during 2045?2049. The potential growth rate is estimated based on future trends of labor, capital, and total factor productivity, all of which are expected to gradually slow down over time under given conditions.

Potential Growth Rate Could Increase by 0.7%P with Productivity Improvement... Growth Rate Can Be Raised if Structural Reforms Succeed

It is analyzed that the potential growth rate can be raised if South Korea successfully implements various structural reforms. If total factor productivity is improved through fostering an innovation ecosystem and improving labor policies, the growth rate is estimated to increase by an additional 0.7 percentage points.

On the 14th, visitors participating in the '2023 Metaverse Expo' held at COEX in Gangnam-gu, Seoul, are experiencing VR. Photo by Jinhyung Kang aymsdream@

If the concentration in the Seoul metropolitan area is eased, and labor market reforms are implemented to support work-family balance and resolve women's career interruptions, thereby restoring the fertility rate to the OECD average level, the growth rate is expected to rise by 0.1 to 0.2 percentage points. Additionally, if policies supporting work-family balance and improvements in labor market conditions after retirement enhance the relative productivity of women and the elderly, a further increase of 0.1 percentage points is anticipated.

Lee Eun-kyung, head of the Model Forecasting Team at the Bank of Korea’s Economic Modeling Department and author of the report, emphasized, "To effectively raise the potential growth rate in the future, it is essential to enhance productivity through structural reforms across the economy and proactively respond to future changes in the economic structure. It is important to improve inefficiencies in the labor market and induce efficient resource allocation, while enhancing overall economic productivity through improving the business investment environment and fostering innovative companies."

She added, "To mitigate the slowdown in labor supply caused by low birth rates and aging, active responses through policies such as easing concentration in the Seoul metropolitan area and promoting work-family balance are necessary. Multifaceted policy efforts to improve the productivity of women and the elderly are also required."