Korea looks to era of lower growth, analysts say

Korea’s potential growth rate is expected to slow down in years to come, local think tanks said yesterday, spawning concerns that the country’s economy might be entering an era of low growth.

The potential growth rate refers to the maximum possible rate at which an economy can expand without triggering inflation. The country’s central bank earlier said that Korea’s potential growth stood at 3.8 percent.

Many local think tanks, however, worry that the rate could be slowing down sharply in the years to come, calling on the government to prioritize strengthening basic economic momentum that can sustain growth in the mid and long term.

Hyundai Research Institute said in an earlier report that the country’s potential growth rate is currently staying at 3.7 percent, which is sharply down from 6.5 percent in 1990-2000 and 4.2 percent in 2001-2010.

In one of the worst scenarios, the think tank also predicted that the rate could fall to the 1-percent range in 2032, adding that the possibility for such a grim outlook is now growing high.

The Korea Economic Research Institute echoed the view. It said that Korea’s potential growth rate is estimated at 3.45 percent in 2011-12 but the figure is expected to drop to 3.01 percent in 2013-17. It can fall further to 2.06 percent in the 2020s and 1.77 percent in the 2030s.

The think tank said that a 1-percentage point rise in potential growth could translate into job creation ranging from 320,000 to 360,000 over the next five years, calling for the incoming government to place its top priority on strengthening overall economic momentum.

Samsung Economic Research Institute, Korea’s largest private think tank, said last March that the country’s growth potential stood at 3.8 percent but hinted that the figure could drop given the government’s relatively anemic growth projection for this year.

Korea’s economy grew 2 percent last year, the lowest growth in three years, and the government recently slashed its growth outlook for this year from 4 percent to 3 percent. Experts worry that the rate could fall into the 2 percent range again, considering tough external market conditions.

They say that the government needs to take a long-term approach to raise the country’s growth potential rate, adding that efforts should be made first in boosting people’s participation in economic activities.

“It is not easy to raise the growth potential rate in the short-term and we need to take a longer-term approach,” said Lee Geun-tae, an economist at LG Economic Research Institute.

“Given that labor and other human capital are major factors that could raise the rate, it is important to push for polices aimed at increasing the labor-force participation rate among other things,” he added.

Yonhap