Rate slides from 1.85% last year to 1.66% this year, heading to 1.46% in Q4 next year; productivity gains seen as key to any rebound

A semiconductor chip. [Getty Images]
A semiconductor chip. [Getty Images]

An international organization has projected that South Korea's potential growth rate will fall below 1.5% next year — the first time in recorded history it has done so.

The forecast comes even as the country's real GDP outlook has surged on the back of strong semiconductor exports, highlighting concerns that the structural weaknesses of the Korean economy remain unresolved.

According to the latest data released by the OECD on June 3, South Korea's potential growth rate is estimated to fall from 1.85% last year to 1.66% this year, a drop of 0.19 percentage points.

It is then expected to decline a further 0.14 percentage points to 1.52% next year.

The OECD projects the rate — measured year-on-year — will reach just 1.46% in the fourth quarter of next year, continuing a relatively steep downward trend. The organization provides quarterly figures only for the fourth quarter.

This marks the first time South Korea's estimated potential growth rate has fallen below 1.5% since the OECD began publishing the relevant data.

The potential growth rate refers to the rate of increase in potential GDP — the maximum output an economy can sustain using all available labor, capital and resources without triggering inflation. A declining figure signals that the economy's underlying fundamentals are weakening.

Based on the OECD's latest estimates, South Korea's potential growth rate has been on a sustained downward trajectory since 2012, when it stood at 3.62%. It first fell below 3% in 2016, at 2.93%, and dropped below 2% last year, with no sign of a rebound since.

What is particularly striking is that the decline has accelerated even compared with estimates from just six months ago.

In its December report, the OECD had estimated South Korea's potential growth rate at 1.71% for this year and 1.57% for next year, with the fourth quarter of next year still expected to hold above 1.5% at 1.52%.

The latest figures cut this year's and next year's estimates by 0.05 percentage points each, and trim the fourth-quarter-of-next-year figure by 0.06 percentage points.

Park Jeong-woo, an economist at Nomura Securities, attributed the decline to "the combined effect of population aging, shrinking labor supply, slowing capital accumulation and stagnant productivity growth."

The trend stands in sharp contrast to the recent improvement in South Korea's near-term economic outlook. On June 3, the OECD raised its forecast for South Korea's real GDP growth rate this year by 0.9 percentage points, from 1.7% to 2.6%.

The revision appears to reflect strong export performance led by semiconductors and other IT products, as well as a preliminary first-quarter real GDP growth rate of 1.7%.

The OECD data thus suggests that while the semiconductor boom is lifting headline growth figures, it has not resolved the structural constraints holding back the Korean economy.

Some analysts, however, raise the possibility that if the current boom proves structurally durable, the potential growth rate could stage a dramatic rebound.

Choi Ji-wook, an economist at Korea Investment & Securities, noted that the Bank of Korea projects equipment investment growth of 4.4% this year and 2.7% next year. He added that 4.4% would be the highest since 2017, excluding 2021 when a COVID-19 base effect inflated the figure.

He went on to say that "given AI-related investment flows largely into equipment, non-residential construction and intellectual property, the capital stock will expand and have a positive effect on the potential growth rate."

Bank of Korea Governor Shin Hyun-song struck a broadly optimistic note, saying at the BOK International Conference on June 1 that "the Korean economy is robust and the output gap — the difference between real GDP and potential GDP — will turn positive."

Some analysts caution, however, that the potential growth rate figures published by the OECD and similar bodies are mechanically derived from models that heavily weight past trends, and should not be read too literally.

Even so, there appears to be broad consensus that translating the semiconductor cycle's gains into wider investment and productivity improvements across the economy is essential for any meaningful rebound in the potential growth rate.

Park at Nomura said semiconductors account for roughly 30 to 35 percent of total equipment investment, adding that semiconductor investment alone is insufficient to offset the decline or stagnation in the remaining roughly 70 percent of equipment investment.

He said structural reform, market opening and regulatory overhaul are urgently needed to drive productivity gains.

Choi at Korea Investment & Securities also stressed that "the windfall profits and tax revenues generated by AI must feed back into reinvestment rather than one-off distribution," and called for policies that ensure "AI development leads to job creation and greater labor efficiency, not job losses."


oskymoon@heraldcorp.com