KERI warns of drop in potential growth rate

Korea’s potential growth rate could drop to 2.5 percent over the next four years if the government does not lift regulations to stimulate economic growth, a major think tank warned.

A country’s potential growth rate is the maximum possible rate an economy can grow without triggering inflation.

The Korea Economic Research Institute (KERI) predicted in a report Sunday that the potential growth rate, currently projected at around 2.7 percent, will drop to 2.5 percent on average between 2019 and 2022. That figure was projected to decrease even further to an average of 2.3 percent from 2023 to 2030 and eventually fall to around 1 percent in the 2030s.

“This result is evidence that the recent high growth period is coming to an end and that a low-growth level is becoming a norm,” the report said.

“In order to bolster the potential growth rate, authorities need to make drastic moves to reform economic structures and abolish regulations, leading to higher productivity.”

To cope with slowing growth, the report advised local companies to make more aggressive investments rather than sticking to conservative ones.

Unlike in the past, when the Korean economy saw productivity increases from the supply side - mainly demand for exports - the country has been suffering from flagging productivity growth since the 2008 global financial meltdown, the report added.

According to the Korea Development Institute (KDI), real value-added productivity per employee in the 1990s grew at an average yearly rate of 5.2 percent. This fell to 3.1 percent in the 2000s and 1.6 percent average since 2011.

Korea’s total factor productivity, which refers to inputs like technologies, resources and regulations while excluding labor and capital, has also fallen. The contribution of total factor productivity to gross domestic product in the ’90s was 2 percentage points. This fell to 1.6 percentage points in the ’90s and, in recent years, further retreated to 0.7 percentage points.

“If productivity drops more quickly, the potential growth rate can be lower than what we expected,” the KERI report said.

The Sunday report follows several economic institutes slashing their forecasts for Korea’s economic growth this year.

Last month, the Bank of Korea lowered its forecast for the country’s economic growth this year by 0.1 percent to 2.5 percent, citing weak exports, lower corporate earnings and tepid investment.

Moody’s modified its growth outlook from 2.3 percent predicted in November to 2.1 percent earlier this year.

The International Monetary Fund maintained its previous projection of 2.6 percent earlier this year, but called for a supplementary budget worth around 9 trillion won ($7.53 billion) to achieve the target.

While this year’s budget is at an all-time record of 469.6 trillion won, the Moon Jae-in administration requested an additional 6.7 trillion won supplementary budget at the National Assembly last month. The KDI said in a report earlier this month that expanded government spending could help growth, but it is not a solution from a long-term perspective. It warned that an expansionary fiscal policy will only strain government finances in the future.

BY KO JUN-TAE [ko.juntae@joongang.co.kr]