Economic Fundamentals Overshadowed by Semiconductor Boom... Potential Growth Rate Projected to Drop to Mid-1% Range Next Year

Although South Korea’s GDP growth rate posted a surprising performance in the first quarter of this year, there are projections that the country’s potential growth rate, which reflects the underlying strength of the economy, could fall to the 1.5% range next year. While the current upturn in the semiconductor cycle has brought some optimism, analysts warn that the weakening of the economy’s fundamentals and its structural limitations persist.

According to the latest data from the Organisation for Economic Co-operation and Development (OECD) released on April 26, Korea’s potential growth rate is estimated to decline from 1.92% last year to 1.71% this year, a decrease of 0.21 percentage points. It is expected to fall by an additional 0.14 percentage points to 1.57% next year, marking an all-time low.

Yonhap News Agency

The potential growth rate refers to the growth rate of potential GDP, which is the maximum level of output that an economy can achieve while utilizing all production factors—such as labor, capital, and resources—without causing inflation. Based on the latest OECD estimates, Korea’s potential growth rate has been continuously declining since 2012, when it stood at 3.63%. Since falling below 2% last year, it has failed to stage a rebound. By next year, this will mark a 15-year downward trend.

The decline in Korea’s potential growth rate is attributed to a combination of factors: a decrease in labor and capital input due to low birth rates and an aging population, as well as a slowdown in total factor productivity, which drives productivity growth. All components of potential growth are underperforming.

Jungwoo Park, an economist at Nomura Securities, pointed to several factors driving down the potential growth rate: a shrinking labor supply due to population aging, weakened profitability in manufacturing sectors other than semiconductors, and reduced capital accumulation stemming from declining construction investment. He also noted, “The overall decline in productivity due to the underdevelopment of the domestic service sector is a problem, as all sectors are experiencing falling potential growth rates.” He cautioned that “the downward trend could accelerate further in the future.”

Experts diagnose that, given Korea’s current situation, it is not possible to immediately resolve demographic challenges. Therefore, efforts should focus on capital accumulation and improvements in total factor productivity. They advise that to lay the groundwork for a rebound in the potential growth rate, Korea must discover new key industries beyond semiconductors, strengthen the competitiveness of the service sector, and implement regulatory reforms.

Kim Kwangseok, Head of Economic Research at the Korea Economic Industry Institute, commented, “The semiconductor industry can serve as a catalyst for boosting the potential growth rate through capital input, but the issue is that there is no guarantee the boom will last indefinitely.” He added, “If we assume that, in addition to the ongoing Middle East conflict, the exchange rate enters a path of stabilization, we cannot conclude that semiconductors alone will lift the potential growth rate.”

He continued, “We need to foster another leading industry, in addition to semiconductors, that can drive remarkable growth, increase labor and capital input, and boost productivity. The defense industry could serve as such an example. Furthermore, by nurturing specialists in fields such as artificial intelligence (AI), we should raise productivity and slow the decline in labor input.”

This content was produced with the assistance of AI translation services.