Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Korea rapidly losing steam for potential GDP growth
Bank of Korea (BOK) Governor Rhee Chang-yong attends the 2023 audit on the BOK at the National Assembly in Yeouido, Seoul, Monday. Yonhap
By Yi Whan-woo
The Korean economy is feared to lose steam rapidly in its potential growth rate, which possibly can fall below 2 percent for the first time in history this year and get worse next year.
Addressed by the Bank of Korea (BOK) during an annual parliamentary audit, Monday, such a gloomy outlook means the downward trajectory of the potential growth rate will go on for at least 12 years after marking 3.5 percent in 2013.
Potential gross domestic product (GDP) is defined as the maximum level of growth that a country can sustain over the medium term while keeping inflation stable.
It is comparable to real GDP, which measures the value of all economic outputs ― goods and services ― after adjusting any price changes caused by inflation or deflation.
The Organisation for Economic Co-operation and Development (OECD) forecasts Korea’s GDP growth rate at 1.5 percent for 2023 and 2.1 percent for 2024, which compares with the BOK’s prospects ― 1.4 percent for 2023 and 2.2 percent for 2024.
On Korea’s potential growth rate, the BOK said “around 2 percent” for both 2021 and 2022 but did not give its estimation for 2023 and 2024.
The BOK cited data from the OECD in its report to the National Assembly on the future course of potential GDP growth.
The OECD estimates Korea’s potential growth rate at 1.9 percent for 2023 and 1.7 percent for 2024.
The Paris-headquartered organization was apparently more pessimistic in its outlook than other financial institutions. For instance, the International Monetary Fund (IMF) forecasts Korea’s potential growth rate at 2.2 percent for both 2023 and 2024.
“Even if there are more generous prospects on Korea’s potential growth rate, we still should take the OECD’s forecast as alarming,” Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI), told The Korea Times.
He noted that, in the OECD’s forecast, Korea’s potential growth rate for next year is anticipated to lag behind the United States’ at 1.9 percent.
If realized, such a pace of growth for Korea defies the widely accepted fact that more advanced economies have lower growth potential than lesser-developed economies.
Concerning Korea, it never has been outpaced by a G7 member nation in the OECD forecast on potential GDP since 2001.
The serious nature of Korea’s potential growth rate also can be inferred from the fact that such a rate for multiple G7 members had been going up between 2020 and 2024, with the U.S. going from 1.8 percent to 1.9 percent, Canada from 1.1 percent to 1.6 percent and Italy from 0.3 percent to 0.8 percent.
Asked how Korea can improve its growth potential, economists said a long-term approach is needed to tackle the problem.
“The outputs of goods and services are closely related to labor and capital, meaning a sufficient population is essential for sustainable productivity,” said Cho Young-moo, a senior researcher at LG Business Research.
He pointed out that Korea on the other hand is struggling with a fast-dwindling population in the midst of the world’s lowest fertility rate.