Korea's potential growth rate drops below 2 percent for first time this year

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Korea's potential growth rate drops below 2 percent for first time this year

Published: 07 Jul. 2025, 13:07 Updated: 07 Jul. 2025, 14:39

Audio report: written by reporters, read by AI

A commercial space is up for rent on a street in Myeong-dong, central Seoul, on May 18. [YONHAP]

The Organisation for Economic Cooperation and Development (OECD) forecast Korea's potential growth rate at 1.9 percent for this year, the lowest ever since 2001 and also the first time that the figure has dropped below the 2 percent mark.

The OECD's latest figure is 0.1 percentage point lower than the projection made last December and marks the first time since 2001 that the organization has estimated Korea’s potential growth rate to fall below 2 percent.

The potential growth rate refers to the maximum sustainable growth of an economy without triggering inflation, assuming full and efficient utilization of production factors such as labor and capital. Korea’s potential has been steadily declining due to structural issues such as low birthrates, an aging population and weak innovation.

Korea’s potential growth rate has steadily decreased from 3.8 percent in 2011 and remained around 2.2 percent for three consecutive years starting in 2022 before dropping sharply this year.

During the same period, the United States recorded a rate of 2.1 percent, widening the gap with Korea. Among Group of 7 nations, Canada, Italy and Britain have recently rebounded, whereas Korea continues its downward trend.

Bank of Korea (BOK) Gov. Rhee Chang-yong also stated during the European Central Bank Forum on Wednesday that Korea’s potential growth rate is currently well below 2 percent. The BOK’s report last December projected the 2024–2026 rate at around 2 percent, but recent figures appear to be even lower.

Two convenience stores face each other on a street in Seoul on May 12. [YONHAP]

Meanwhile, the International Monetary Fund (IMF) assessed that Korea’s real GDP has consistently lagged behind its potential GDP. The IMF forecasts Korea’s output gap to be minus 0.4 percent in 2023, minus 0.3 percent in 2024 and minus 1.1 percent in 2025. This indicates that actual economic activity is falling short of capacity, raising concerns that Korea’s economic slump may be structural.

Experts point to structural factors such as population decline and productivity slowdown as the main causes of the drop in potential growth.

A recent report from the BOK noted that Korea’s potential growth rate has declined by 6 percentage points over the past 30 years — a pace faster than that of most other countries. The report emphasized the need for structural reforms and recommended boosting productivity, increasing the birthrate and utilizing foreign labor.

The Korean government is expected to prioritize restoring potential growth as a key policy goal. President Lee Jae Myung had pledged during his campaign to raise the potential growth rate back to the 3 percent range.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY JEONG JAE-HONG [[email protected]]