OECD cuts forecasts for Korea’s potential growth at 1% range

The OECD predicted that Korea's potential growth will fall below 2% this year for the first time and drop to 1.7% next year. The IMF predicted that the Korean economy would be most severely impacted by the U.S.-led de-risking, which could split global supply chains into two. This is a warning that our economy is caught up in a ‘perfect storm’ that cannot be avoided without a new survival strategy.

The OECD forecasted Korea's potential growth rates for 2023 and 2024 at 1.9% and 1.7%, respectively. The potential growth rate is the limit at which a country can achieve growth, mobilizing all its labor and capital without any side effects such as inflation. This is the first time an international organization forecasts Korea's growth potential below 2%. Its forecast for 2024 is even lower than the growth rate of the U.S. at 1.9%. Among the top seven leading economies, countries whose potential growth rates had been evaluated lower than Korea's, including Canada, Italy, and the United Kingdom, have seen potential growth rates rebound and move in directions opposite to Korea.

To make matters worse, the trade-oriented economic system is facing the most challenging external factors ever. The free trade order is being shaken as China and the United States, Korea’s two largest trading partners, compete for hegemony. The IMF predicted that Korea's GDP would be reduced by nearly 4% if the U.S.-led group of developed economies and China reduced trade volumes with each other. If the U.S. and China strengthen their trade barriers against all countries, Korea's GDP will be further slashed by 10%, which would have more significant damage than China's at 6.9%.

The Korean economy losing its fundamentals has been a predicted crisis. Since the 1990s, the nation’s growth rate has dropped by 1 percentage point every five years, fueled by a low birth rate and an aging population. Structural reforms in labor and education, which would raise low productivity, are struggling. Korea’s stringent regulation, opposition from local interest groups, and high value-added service industries, such as medicine and finance, are unable to create high-quality jobs. Decent manufacturing jobs are rapidly disappearing as the external environment grows more adverse.

The growth strategy relying on a handful of conglomerates with global competitiveness and limited export items, such as semiconductors, smartphones, and automobiles, is no longer effective. It is time to redraw the blueprint of the economy, benchmarking developed countries that have regained their potential through innovation in regulation and proactive immigration policies to attract overseas talent.