Potential Growth Rate Rises for Second Straight Year — First Rebound in 40 Years
South Korea's potential growth rate, a measure of the economy's growth capacity, is projected to rise for a second consecutive year. According to the World Economic Outlook released by the International Monetary Fund (IMF) in October, the country's potential growth rate stands at 2.14% this year and 2.20% next year. A two-year rise is the first in 40 years since 1986–1987, when the economy boomed on low oil prices, a weak dollar, and low interest rates. After falling from 2.06% in 2023 to 1.96% in 2024, the rate climbs by 0.20 percentage points this year and 0.06 percentage points next year, returning to the 2% range. These figures were back-calculated from the IMF's real GDP growth forecasts (3.33% this year, 2.83% next year) and output gap ratios (0.548% this year, 1.168% next year).
The potential growth rate is the growth rate of potential gross domestic product (GDP), which refers to the level of output that can be sustained without triggering inflation. While real GDP growth can be temporarily boosted by stimulus, the potential growth rate reflects the economy's underlying capacity to grow. Its rebound means that growth capacity has unusually expanded despite structural constraints such as aging and a shrinking labor supply.
Back-calculating past IMF data using the same method shows the last time the potential growth rate rose two years in a row was 1986–1987, when it climbed from 9.67% in 1985 to 9.77% in 1986 and 9.91% in 1987. The rate also rebounded in 2010 and 2021 on base effects from the global financial crisis and COVID-19, but neither rebound carried over into the following year.
The long-term trend has been one of decline. The potential growth rate fell from 4.05% in 2010 to 3.67% the following year, entered the 2% range at 2.97% in 2018, and plunged to 1.28% in 2020. This year's projected 2.14% is the highest in five years since 2021 (2.23%).
The Organisation for Economic Co-operation and Development (OECD), by contrast, projected in June that Korea's potential growth rate would decline, estimating 1.85% last year, 1.66% this year, and 1.52% next year. The National Assembly Budget Office, meanwhile, forecast in its 'NABO Economic Outlook 2027' released late last month that the rate would rise to 2.22% this year and 2.28% next year, citing upward revisions to real growth forecasts, expanded AI and semiconductor investment, and productivity gains from the spread of AI.
With the semiconductor boom lifting the economy's underlying strength — its growth potential — a long-running downward trend appears to be changing course.
