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S.Korea's potential growth rate drops to record low

Bank of Korea says COVID-19 dents 2021-2022 potential economic growth by 0.2 pct points

By Sep 14, 2021 (Gmt+09:00)

(Source: Getty Images Bank)
(Source: Getty Images Bank)

The COVID-19 pandemic has dampened South Korea's growth potential between this year and the next by 0.2 percentage points to its historic low of 2.0%, according to the Bank of Korea. 

The central bank also revised down the country's 2019-2020 potential economic growth rate by 0.4 percentage points to 2.2%, from its previous estimate of 2.5-2.6% announced in 2019. 

"Structural factors such as a drop in the labor force and the COVID-19 impact weighed on the potential economic growth rate," Bank of Korea's senior research official Chung Won-seok said in a news briefing on Monday.

South Korea's potential economic growth rate has been on the decline since the Bank of Korea (BOK) began compiling the relevant data in 1991.

The projected 2.0% for the period of 2021 and 2022 represents the lowest rate for the country, about one-third of the 6.1% between 1991 and 2000. The number compares with the International Monetary Fund's projection of 1.8% for South Korea's potential growth rate for the period of 2020 and 2022.

Potential growth refers to the maximum growth rate that an economy can achieve without generating excess inflation. It measures the country's labor force, capital investment and total factor productivity that encompasses technology innovation and regulations.

South Korea’s Potential Economic Growth Rate

Note: Average annual growth rate

Source: Bank of Korea

Graphics by Jerry Lee

Following the onset of the COVID-19 pandemic, increased unemployment and suspended production at manufacturing facilities due to component shortages have undermined productivity growth. 

Other advanced economies, including the US, UK and Japan, have lowered their potential growth rates by 0.1 to 2.1 percentage points as well. 

In the first half of this year, the number of those seeking jobs for four months or longer increased by an average of 49,000 per month in South Korea from a year earlier. Women's participation in the labor market declined to take care of staying-at-home children.

The government's growing role in the economy to cope with the pandemic impact is blamed as another factor that drags down economic productivity.

BOK expects the growth potential to recover once the COVID-19 pandemic subsides. But some economists warn the growth potential would tumble to zero if the current trend continues, pointing to the country's falling birthrate .

South Korea's workforce, or those aged between 15 and 64,  is expected to shrink by 1.6 million to 34.2 million in 2025 versus 35.8 million in 2020, according to Statistics Korea. The workforce will continue to dwindle to 32.2 million in 2030 and 27.0 million in 2040, the government statistics agency has said.

The Korea Institute of Finance, a research institute, forecast the country's potential growth rate would decline to 1.57% in 2025 and 0.71% in 2035, if the current growth trend continues.

"In order to revive potential economic growth, the government needs to step up support for new growth industries and improve the corporate investment environment," said BOK's Chung. "We also need to implement policies to increase the labor force participation by women and youth worst hit by the pandemic." 

The Bank of Korea last month raised the policy rate by 25 basis points to 0.75% to rein in surging household debt and inflationary pressures.

Write to Ik-hwan Kim at lovepen@hankyung.com

Yeonhee Kim edited this article.

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