Potential growth falls to 1.71%, reforms needed to avoid stagnation

 

Containers are stacked at Pyeongtaek Port in Gyeonggi on April 1. [YONHAP]

 
Korea’s economic growth engine is cooling rapidly. The Organisation for Economic Cooperation and Development (OECD) projected Korea’s potential growth rate this year at 1.71 percent, down 0.21 percentage points from last year’s 1.92 percent, which had already fallen below 2 percent for the first time. The forecast for next year is even lower at 1.57 percent. If realized, the trend would mark a continuous decline since 2012, when the rate stood at 3.63 percent. Concerns are growing that growth could become stuck in the 1 percent range, as Korea risks sinking deeper into a low-growth trap while being distracted by a semiconductor boom.
 
While it is natural for potential growth to decline as economies mature, Korea’s pace of decline is unusually steep. According to a report by the Bank of Korea, the country’s potential growth rate dropped by six percentage points between 1994 and 2024. That amounts to a decline of roughly one percentage point under each administration. If the trend continues, negative potential growth could eventually emerge. The Korea Development Institute has warned that without structural reforms, Korea’s potential growth could fall into the zero percent range in the 2030s and turn negative in the early 2040s.
 
The administration of President Lee Jae Myung has set a target of achieving 3 percent potential growth and declared this year the starting point for a rebound. It has drawn encouragement from the stronger-than-expected first-quarter growth of 1.7 percent. However, that figure reflects temporary factors such as a semiconductor upcycle, exchange rate effects and a low base from the previous year, making it difficult to interpret as a sign of underlying strength.
 

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Korea’s economy now faces multiple structural challenges. A declining birthrate and aging population are reducing the labor force, while technological innovation has slowed. Industrial competitiveness is weakening as rigid labor market conditions persist and new regulations, including recent labor legislation, add further constraints. In manufacturing, a traditional strength, many sectors are losing ground to China in both quality and price competitiveness. At the same time, the spread of artificial intelligence is accelerating job losses among people in their 20s and 30s.
 
The only effective response is comprehensive structural reform to restore competitiveness. Yet government policy remains focused on short-term stimulus measures and efforts to support stock markets. The OECD’s message is clear: Unless Korea moves beyond the illusion created by the semiconductor sector and undertakes sweeping economic reforms, it will struggle to escape prolonged low growth.


This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.