South Korea’s economy is expected to operate below its potential capacity for six consecutive years through 2025. (Image courtesy of Yonhap)
SEOUL, Dec. 2 (Korea Bizwire) – South Korea’s economy is expected to operate below its potential capacity for six consecutive years through 2025, according to new projections from the Organization for Economic Cooperation and Development (OECD), raising concerns about structural weakness in what was once one of Asia’s fastest-growing economies.
Among the Group of 7 nations and South Korea, only France is forecast to experience a similar prolonged period of underperformance, according to data submitted by the Bank of Korea to the National Assembly’s Public Administration and Security Committee.
The gap between South Korea’s actual and potential GDP — a measure of economic efficiency known as the output gap — has been negative since 2020 and is projected to remain so through 2025, the OECD estimates show.
This marks an unprecedented streak of underperformance for an economy that, until 2019, had never experienced negative output gaps for more than two consecutive years since 2001.
The output gap, which measures the difference between actual GDP and potential GDP, is projected at -1% for 2023, improving slightly to -0.4% in 2024 and -0.3% in 2025. These figures follow gaps of -2.5% in 2020, -0.6% in 2021, and -0.3% in 2022.
“This persistent negative output gap suggests more than just a cyclical downturn — it points to structural economic stagnation,” said Ahn Dong-hyun, a professor of economics at Seoul National University.
“Unless it’s an overestimation of potential GDP by the international organization, which is less likely, this indicates that Korea’s economy is consistently failing to reach its potential.”
The concerns are compounded by a steady decline in South Korea’s potential growth rate, which has fallen from 5.4% in 2001 to 2% in 2023-24. This decline is particularly striking when compared to G7 nations, several of which have seen their potential growth rates increase in recent years. The United States, for instance, is projected to see its rate rise from 1.9% in 2020 to 2.1% in 2024.
In a significant shift, South Korea’s potential growth rate (2%) was surpassed by that of the United States (2.1%) last year — the first time in 24 years of OECD estimates that a G7 nation has exceeded South Korea’s rate. This development is particularly noteworthy given the vast size difference between the two economies.
Bank of Korea Governor Rhee Chang-yong has acknowledged these challenges but maintains a cautiously optimistic outlook.
“While we may not see 3-4% growth rates anymore, it would be too pessimistic to assume we’re destined for zero-percent growth like Japan,” Rhee said at a recent meeting.
“With proper reforms in labor markets and better utilization of women and foreign workers, we should aim for growth above 2%.”
However, experts suggest the Bank of Korea might need to revise its potential growth rate estimates downward. The central bank, which currently estimates the rate at “around 2%,” is expected to release new figures as early as this month.
“There’s been a tendency to slightly overestimate the potential growth rate to avoid dampening economic expectations,” Ahn noted. “But now, a reduction to around 1.8% or 1.9% seems necessary.”
The persistent output gap and declining potential growth rate reflect deeper structural challenges facing the South Korean economy, including rapid aging, low birth rates, and insufficient innovation. These factors have led some experts to suggest that South Korea may be entering a period of prolonged structural stagnation.
Cho Young-moo, a research fellow at the LG Economic Research Institute, warned that while the negative output gap is concerning, policy responses need to be carefully calibrated.
“Aggressive fiscal spending or rapid interest rate cuts to close this gap could lead to undesirable side effects such as fiscal deficits and inflation,” he cautioned.
M. H. Lee (mhlee@koreabizwire.com)
