[Inside Chodong] What Lies Beyond 0.8% and 1%

"0.8% Growth Needed in Second Half to Achieve 1% Annual Rate"
Weighing the Scenarios, but... The Real Issue is the Continued Decline in Potential Growth Rate
Time to Break the Cycle of Failure and Tackle Fundamental Problems Head-On

The South Korean economy has now received its complete report card for the first half of this year. The first half saw a roller-coaster ride, with a shocking 0.2% contraction in real GDP in the first quarter, followed by a 0.6% growth in the second quarter, surpassing forecasts. Now, attention is turning to the economic performance in the second half of the year, which will determine the annual growth rate. The key question is whether the symbolic 1% mark can be surpassed this year. Major domestic and international institutions have clustered their forecasts between 0.8% and 1.0%.

To assess this, there is active calculation of possible scenarios regarding remaining variables in the second half, such as US tariff policies and the recovery of domestic demand. The Bank of Korea has stated that to achieve a 1% growth rate this year, an average growth of 0.8% is needed in the second half. Regarding tariffs, if the US adjusts mutual tariff rates with South Korea to 15% as it did in negotiations with Japan, it would not deviate significantly from the assumptions made in the May economic outlook, and the impact would be "slightly negative." As for supplementary budgets, the first round, focused on government spending, and the second round, centered on private consumption, are both expected to have a positive effect on improving the numbers. There is also interest in when the recently distributed livelihood recovery consumption coupons will begin to impact GDP. On this point, it was assessed that "although it cannot be equated with the 2020 emergency relief funds, the experience at that time showed that the effect was significant in the early stages of distribution."

However, there is a more fundamental issue than whether the final figure for this year will be 0.8% or 1.0%. The potential growth rate, which is the fundamental strength of the Korean economy, continues to decline. From over 5% in the early 2000s, it has now fallen to below 2%. The new administration presented a target of 3.0% for the potential growth rate upon taking office. However, experts point out that at this rate, not only will 3% be out of reach, but the rate could fall into the 0% range within ten years. Fundamental structural reforms are necessary, such as "demographic structure reform" to address the declining working-age population caused by low birth rates and aging, and "industrial structure reform" to foster new innovative companies, but none of these are easy to achieve.

At a recent seminar held by the Korea Future Population Research Institute, various alternatives were proposed for regional development as part of demographic structure reform. Participants agreed that the existing balanced development policy, which has been pursued for over 60 years, has revealed its limitations. The local extinction response fund, into which the government has injected about 1 trillion won annually since 2022, has also been evaluated as failing to achieve substantial results in regional balanced development.

The new administration is promoting the "Five Mega-Regions and Three Special Zones" strategy as a blueprint for regional balanced development. This involves specializing key functions such as industry, administration, education, and transportation in five major mega-regions?Seoul Metropolitan Area, Southeastern Region, Daegu-Gyeongbuk Region, Central Region, and Honam Region?and three major special self-governing provinces?Jeju, Gangwon, and Jeonbuk. However, there are skeptical voices suggesting that unless development comparable to Seoul is achieved, it will be difficult to prevent the concentration of population and resources in the capital region. The core, they argue, is to establish at least one successful regional model. On the other hand, there are also questions about whether the problem can be solved solely through the economic logic that "the disappearance of some regions is inevitable."

Beyond the 0.8% and 1% figures lies the uncomfortable truth that the Korean economy is converging toward low growth, and that the continued decline in the potential growth rate, which will cement this low growth, is happening even now. Amid these trends are both economists concerned for the country and the sincere hopes of residents in regions facing extinction. Recognizing this crisis as a true crisis, based on their genuine concerns, is the starting point for fundamental problem-solving.