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Korea's potential GDP rate to drop below 2% next year, OECD says

Published: 12 May. 2025, 17:55

Containers at Sinseondae Dock in Busan on April 30. [YONHAP]

The Organisation for Economic Cooperation and Development (OECD) has projected that Korea’s potential GDP growth rate will dip below 2 percent next year — a first since the OECD began collecting such data in 1986.

According to related sources on Monday, the OECD’s latest biannual analysis report, "Economic Outlook," revised Korea’s potential growth rate for 2025 down to 1.98 percent, a slight drop from 2.02 percent this year. This marks the first time the OECD has projected Korea’s potential growth in the 1-percent range.

The 10-year average decline in Korea’s potential growth rate — from 2017 to 2026 — is 1.02 percent, the seventh largest among the OECD’s 37 member states. Countries with steeper drops include Ireland (6.90 percent), New Zealand (1.81 percent) and the Czech Republic (1.49 percent), though all have significantly smaller economies than Korea.

In contrast, Italy and Spain, whose economies are comparable in size to Korea’s, are expected to see increases of 1.19 and 0.72 percent, respectively.

The OECD’s projection aligns with similar forecasts issued recently by domestic institutions. In March, the National Assembly Budget Office projected Korea’s potential growth rate at 1.9 percent in 2025.

The Korea Development Institute (KDI) estimated this year’s rate at 1.8 percent and forecast a steady decline — to 1.5 percent between 2025 to 2030, 0.7 percent between 2031 to 2040 and 0.1 percent between 2041 to 2050. KDI warned that in two decades, Korea’s economic growth engine could come to a complete halt.

Potential growth refers to the maximum level of economic output a country can achieve without triggering inflation, using all available resources. In simpler terms, it reflects a country’s long-term economic capacity.

The primary factor dragging down Korea’s potential growth is population aging due to declining birthrates. The working-age population, ages between 15 to 64, peaked in 2019 at 37.63 million and has been shrinking ever since, accelerating labor shortages.

“Declining labor due to aging ultimately reduces the national savings rate,” said Ryu Deok-hyun, an economics professor at Chung-Ang University. “That inevitably leads to reduced investment in physical capital.”

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY JANG WON-SEOK [[email protected]]