Negative growth likelihood has tripled in past decade, BOK says 'structural reforms' required

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Negative growth likelihood has tripled in past decade, BOK says 'structural reforms' required

Published: 08 Jun. 2025, 15:27 Updated: 08 Jun. 2025, 23:17

Audio report: written by reporters, read by AI

Cargos are piled up at Pyeongtaek Port in Gyeonggi on April 24. [NEWS1]

Korea’s economic “resilience” has weakened, raising the likelihood of negative growth. The country's potential growth rate is declining due to low birthrates and an aging population, and delays in structural reforms such as export diversification have left the economy more vulnerable to external shocks like U.S. tariff policies.

As concerns mount over prolonged low growth, calls are growing to resist the lure of short-term stimulus measures and instead focus national efforts toward long-term economic restructuring.

Quarterly real GDP has dropped into negative territory only once — in the fourth quarter of 2008, by 3.4 percent — between the 2008 financial crisis and the mid-2010s, the Bank of Korea (BOK) said Wednesday.

However, since births began sharply declining in 2015, the economy has contracted in six separate quarters: the fourth quarter of 2017 by 0.2 percent, the first and second quarters of 2020 by 1.3 percent and 2.7 percent respectively, the fourth quarter of 2022 by 0.5 percent, the second quarter of 2024 by 0.2 percent and the first quarter of this year by 0.2 percent.

Although the negative growth in the fourth quarter of 2017 can be attributed to a base effect following strong earlier quarters — the annual growth rate that year was 3.4 percent — the economy’s structural decline in resilience means it has become more susceptible to shocks like the Covid-19 pandemic in 2020 or the semiconductor downturn in 2022.

BOK Gov. Rhee Chang-yong has also warned that Korea’s economy is becoming structurally vulnerable.

“The average potential growth rate has fallen below 2 percent from the previous 3 percent,” said Rhee at a news conference on Thursday after the key interest rate was lowered. “Due to our high dependence on exports, the fluctuations in economic growth have widened, and the probability of growth falling below 1 percent, or even into negative territory, has significantly increased. Analysis shows that while the probability of negative growth during the global financial crisis was around 5 percent, it now stands at 14 percent.”

Bank of Korea Gov. Rhee Chang-yong speaks to reporters at a hotel in Milan, Italy, on May 6, in this photo provided by the bank. [YONHAP]

“This means that since the mid-2010s, the likelihood of negative quarterly growth has nearly tripled compared to earlier periods,” said a BOK official, adding that a related analytical report will be published soon.

The annual growth rate of Korea’s potential output has steadily declined. It hovered around 5 percent in the early 2000s, dropped to the mid-3 percent range in the 2010s and fell to the mid-2 percent range from 2016 to 2020. Taking into account the pandemic shock, the growth forecast for 2021 to 2023 was estimated at 2.1 percent, and it is expected to remain at around 2 percent for now.

The BOK projects that, without intervention, the rate will continue to decline, reaching an annual average of 1.8 percent for 2025 to 2029, 1.3 percent for 2030 to 2034, 1.1 percent for 2035 to 2039, 0.7 percent for 2040 to 2044 and 0.6 percent for 2045 to 2049.

Meanwhile, low birthrates and an aging population are further suppressing private consumption, the foundation of domestic demand.

A recent BOK report found that population structural changes — including a shrinking working-age population and a rise in economically vulnerable single-person households — have slowed the annual average consumption growth rate by about 0.8 percentage points each year on average from 2013 to 2024.

Lee Jae-myung, the new president of Korea, during his campaign at the Suwon Yeongdong Market in Gyeonggi on May 26 [JOONGANG ILBO]

The report showed that the trend growth rate dropped 1.6 percentage points compared to 2001 to 2012, attributing half this drop to demographic shifts. Broken down further, a 0.6 percentage point reduction stemmed from lower income-generation capacity due to reduced labor input, and a 0.2 percentage point decline was linked to decreased consumer sentiment amid retirement insecurity. In 2012, the working-age population peaked at 73.4 percent of the total.

“From 2025 to 2030, when population decline and aging are expected to worsen, demographic changes will likely slow consumption by as much as 1 percentage point,” said Park Dong-hyun, head of structural analysis at the BOK. Additional headwinds on consumption include growing household debt and widening income inequality.

Even if inflation stabilizes and the BOK cuts interest rates to inject liquidity into the market, these structural trends may prevent a meaningful rebound in consumption.

“While cyclical consumption slowdowns can be addressed through countercyclical policies like supplementary budgets, structural and trend-driven slowdowns require structural reforms,” said Park. “For example, creating an environment in which second-generation baby boomers can remain in stable salaried employment instead of over-entering the self-employed sector after retirement would be one potential solution.”

Experts emphasize that what matters most is that the incoming administration takes the right first step in structural reform.

“Rather than chasing short-term results, the government must focus on sowing seeds over its five-year term that may not bear fruit for decades,” said Ahn Dong-hyun, a professor of economics at Seoul National University. “If we want to foster new growth engines like the artificial intelligence industry, we need to appoint top experts with full authority and create mechanisms that ensure policy continuity, even if the administration changes, so companies keep investing and talent development continues.”

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY KIM KYUNG-HEE [[email protected]]