An analysis from the Bank of Korea has been released, indicating that the 'potential growth rate,' which is fundamental to our economy's core strength, will decrease to the mid-1% range in 10 years and fall to the 0% range in 20 years. The potential growth rate is the maximum production level that a country's economy can achieve without causing inflation while utilizing all production factors.
On the 19th, the Bank of Korea revealed this information through the report 'Potential Growth Rate of Our Economy and Future Outlook.' The report was authored by Eun-kyung Lee, Dong-min Cheon, Directors at the model forecasting team of the Bank of Korea, and research officials Jung-wook Kim and Dong-jae Lee.
According to the authors, the potential growth rate decreased from around 5% in the early 2000s to the mid-3% range in the 2010s, and to the mid-2% from 2016 to 2020. It was 2% from 2024 to 2026. The decline in potential growth rate signifies that the core strength of our economy is weakening.
Bae Byoung-ho, head of the economic model office at the Bank of Korea, explained the background of the declining potential growth rate by saying, "while the contribution of total factor productivity is decreasing due to a lack of innovation and inefficient resource allocation in our economy, the contribution of labor and capital input has decreased due to slowing investment with changes in the population structure and the maturity of the economy."
The Bank of Korea predicted that without additional structural reforms and if the current trend persists, the potential growth rate will fall to the mid-1% range in the 2030s and to an annual average of about 0.6% in the late 2040s. This prediction assumes a gradual slowdown in the contributions of capital input and total factor productivity, as well as a gradual decline in labor input contributions.
However, the authors argued that structural reforms could slow the decline of the potential growth rate. They emphasized, "if structural reforms that have been discussed, such as creating an innovation ecosystem, easing the concentration in metropolitan areas, and policies for balancing work and family, are successfully implemented, the potential growth rate will rise further."
Specifically, it was analyzed that improvements in ▲total factor productivity, ▲increase in birth rates, and ▲improvements in labor productivity for women and the elderly will lead to respective increases of ▲0.7 percentage points, ▲0.1-0.2 percentage points, and ▲0.1 percentage points compared to the late 2040s forecast.
The authors noted, "to effectively increase the potential growth rate in the future, it's essential to enhance productivity through structural reforms across the economy while proactively responding to future economic structural changes," adding, "it's also necessary to make diverse policy efforts to improve the corporate investment environment, foster innovative corporations, and mitigate the slowdown in labor supply caused by low birth rates and aging."