South Korea's Potential Growth Rate Plummets to Around 2%, Warns Central Bank

South Korea's potential for economic growth is dwindling, according to a report released Thursday by the Bank of Korea (BOK), which attributes the decline to a lack of innovation and inefficient resource allocation. Reuters reports that the central bank estimates the potential growth rate, defined as the maximum achievable growth without triggering inflation, to have fallen to around 2% for the period from 2024 to 2026.

The BOK's analysis reveals a steady decline in South Korea's potential growth rate over the past two decades. The rate, which hovered in the lower 5% range in the early 2000s, fell to the mid-to-lower 3% range during the 2010s and has reached the mid-2% level by 2020. The central bank cites a lack of innovation and inefficient resource allocation as key factors driving this downward trend.

Looking further into the future, the BOK projects a continued decline in potential growth, forecasting a range of mid-to-lower 1% in the 2030s and settling around 0.6% by the late 2040s. However, the report emphasizes that this pessimistic outlook is not predetermined. The BOK asserts that South Korea's response to this challenge through structural reforms will significantly influence the outcome.

The BOK identifies several crucial areas for reform to potentially boost the economy's potential growth, including fostering an ecosystem conducive to innovation, promoting balanced development between the capital region and other parts of the country, and implementing work-life balance policies.