Low growth may be the new normal

The Korean economy’s potential for growth over the past three years, although improved from 2008-9, has lost steam largely due to an aging population and decreasing fixed investment, according to a study by the Bank of Korea.

Using different models, the study estimated Korea’s growth potential at between 3.3 percent and 3.8 percent annually since 2010.

This is an increase from the 2.5 percent to 3.4 percent range estimated from 2008-9. However, it is a steep drop from 6.7 percent in the 1990s and the 4.4 percent to 4.6 percent range in the 2000s.

Potential growth is an estimate of the maximum a nation’s economy could achieve without affecting consumer prices.

The report was released a week after the BOK announced the economy inched up 0.9 percent in the first three months of 2013 compared to the previous quarter.

Although this was higher than projections, it only deepened concerns about long-term stagnation. It was the first time the quarterly growth has been on a flat line expansion for eight consecutive quarters since the second quarter of 2011.

Furthermore, the GDP gap, which is the difference between actual and potential economic expansion, is estimated to be between minus 0.7 percent and 1.2 percent for this year. Last year, the GDP gap was between minus 1.3 percent and minus 1.8 percent.

When the GDP gap is negative, normally the monetary policy lowers interest rates to boost the economy.

The central bank last month kept the key rate at 2.75 percent for the sixth consecutive month, citing possible recovery in the latter half of the year. Although the central bank lowered its projection for growth this year from 2.8 percent to 2.6 percent, BOK Governor Kim Choong-soo said he was confident the Korean economy would slowly recover as the global economy improves.

The rapid aging of society and its effect on growth potential has been a key concern in recent years. Last month, the Korea Institute for Industrial Economics and Trade noted in a report that the nation’s manufacturing industry will likely be impacted by the aging population. It said the rate at which the population is aging is the fastest among OECD member countries, including Japan, which held the top position in 2003.

Koreans aged 65 years or older account for 12.2 percent of the total population, compared to 7 percent in 2000.

The population of young people who could make long-term contributions to the economy is at its lowest level in two decades.

By Lee Ho-jeong [ojlee82@joongang.co.kr]