[비즈한국] As analyses emerge suggesting that South Korea's potential growth rate has begun to fall into the 1% range this year, concerns are growing over the collapse of the economy's fundamental strength. While some explain that the decline in the potential growth rate is a natural phenomenon occurring during the process of economic advancement, concerns are mounting because the pace is faster than that of major advanced economies in the G7 (the United States, Germany, the United Kingdom, Italy, Japan, Canada, and France).
President Lee Jae-myung presented three major visions—growth, recovery, and happiness—under the motto "Building a Real Republic of Korea" in his campaign platform during the presidential election. In the area of growth specifically, he proposed concrete targets of a 3% potential growth rate, becoming one of the top 3 AI powers, and ranking as a top 5 global power.
President Lee’s emphasis on a 3% potential growth rate is due to the alarming downward trend of South Korea's potential growth. The Organisation for Economic Co-operation and Development (OECD) estimated that South Korea's potential growth rate fell from 2.2% last year to 1.9% this year. The OECD predicted that the rate would remain at 1.9% next year, making it difficult to return to the 2% range.
The Bank of Korea also projected that, starting this year, South Korea's potential growth rate would enter the 1% range. According to the Bank of Korea's data on "Our Economy's Potential Growth Rate and Future Outlook," the growth rate was in the low 2% range until the early to mid-2020s. However, the potential growth rate for 2025–2029 is estimated at 1.8%. The outlook suggests that once it falls into the 1% range, it will be unable to escape this downward trend. The Bank of Korea expects the potential growth rate to decline to 1.3% in 2030–2034, 1.1% in 2035–2039, and further drop to 0.7% in 2040–2044, failing to even maintain the 1% level.
Similar forecasts have been released by the National Assembly Budget Office. In its recent report on the "South Korean Economy," the National Assembly Budget Office estimated that the country's potential growth rate dropped to 2.0% last year and would fall to 1.9% this year. It expects this trend to continue, with the rate declining to 1.7% by 2028.
The International Monetary Fund (IMF) projected that while South Korea's potential growth rate fell to 1.9% in 2021 due to the aftermath of COVID-19, it would gradually improve to maintain 2.0% this year. However, it predicted that by 2030, the rate would fall back to 1.9%, resuming a downward trend.
A decline in potential growth is a problem that arises as an economy develops. It becomes difficult to inject low-wage labor as in the past, and large-scale investments by companies or the government also tend to decrease. However, the decline in South Korea's potential growth rate is excessively fast compared to other advanced countries.
According to OECD data on the potential growth trends of the G7 over the past five years, the average potential growth rate, which was 1.1% in 2020, remained at 1.1% in 2025. Among the G7, Japan's potential growth rate fell by 0.5 percentage points from 0.7% in 2020 to 0.2% in 2025, but during the same period, countries like Italy (0.6%→1.3%), Canada (1.2%→1.7%), and the UK (1.0%→1.2%) actually saw an increase. The United States saw its potential growth rate fall by only 0.2 percentage points, from 2.3% in 2020 to 2.1% in 2025. During the same period, France (1.1%→1.0%) and Germany (0.6%→0.5%) also saw slight declines of 0.1 percentage points.
In contrast, South Korea's potential growth rate dropped from 2.4% in 2020 to 1.9% in 2025. This is a 0.5 percentage point decline, similar to that of Japan, which is experiencing its "Lost 30 Years." South Korea's potential growth rate this year is also 0.2 percentage points lower than that of the United States, the world's largest economy.
This is because South Korea is showing weakness in all three key elements of potential growth: labor, capital, and productivity. Labor has already been having a negative effect on the potential growth rate for the past decade due to population decline and reduced working hours. Furthermore, capital investment is shrinking, weakening its net effect on the potential growth rate. In this situation, the only thing left to rely on is productivity, but this is also on a downward trend as neither companies nor the government are innovating properly.