South Korea's growth potential slides to record low, ranking 31st among OECD nations

South Korea's potential growth rate is expected to hit a record low this year, falling into the 1 percent range and pushing the country outside the top 30 among major economies tracked by the OECD — a ranking that has slipped every year in recent memory.

The potential growth rate measures the maximum pace at which an economy can expand without stoking inflation, drawing fully on its labor, capital and natural resources. It is, in effect, a gauge of an economy's underlying fitness.

According to data the OECD released June 3, South Korea's potential growth rate is forecast to fall to 1.66 percent this year, down 0.19 percentage points from last year's 1.85 percent.

The OECD projects a further decline to 1.52 percent next year — 0.14 percentage points below this year's figure — which would mark an all-time low.

A shrinking labor supply driven by a low birth rate and an aging population, compounded by slowing investment, is eroding South Korea's growth potential faster than most peer economies.

South Korea's potential growth rate averaged 5.03 percent between 1997 and 2007, ranking seventh among the 47 major economies the OECD analyzed — a position firmly in the upper tier.

By 2013 it had slipped to 3.41 percent and 10th place. In 2016, at 2.93 percent, the rate fell below 3 percent for the first time, dropping South Korea to 13th.

The country held a mid-tier ranking through 2024, but last year's reading of 1.85 percent — a drop of 0.60 percentage points — pushed it below 2 percent for the first time. The ranking fell 13 places in a single year, to 28th.

Analysts attribute the deterioration to a combination of structural factors: US tariff shocks that have dampened exports and corporate investment, and heightened political uncertainty following the martial law crisis, which has weighed on consumer and business sentiment.

This year's reading of 1.66 percent places South Korea 31st — its first time outside the top 30. The OECD forecasts a further slide to 32nd next year, when the rate is projected at 1.52 percent.

The OECD revised its forecast for South Korea's actual economic growth this year up to 2.6 percent, a gain of 0.9 percentage points from its projection three months ago — the largest upward revision among G20 members, driven by strong semiconductor exports.

The fact that the OECD raised its near-term growth forecast while simultaneously lowering the potential growth estimate is widely read as a warning: the semiconductor boom is masking a deeper erosion of the economy's fundamental strength.

The pace of South Korea's decline stands out even against countries with comparable purchasing-power-parity GDP. Between 2012 and 2027, South Korea's potential growth rate is set to fall by 2.10 percentage points, or an average of 0.14 percentage points a year.

Mexico, whose PPP-based GDP of $3.49 trillion is close to South Korea's $3.28 trillion, saw its potential growth rate fall by only 0.66 percentage points over the same period, from 2.22 percent to 1.55 percent.

Mexico experienced a sharp decline in potential growth similar to South Korea's in the 2010s but managed a rebound in the 2020s, largely on the back of a surge in foreign direct investment driven by US-China tensions and global supply chain realignment.

Mexico's potential growth rate bottomed out at 0.69 percent in 2021, ranking 42nd among the 47 economies. It turned upward in 2022 at 0.81 percent, re-entered the 1 percent range at 1.08 percent in 2023, and is projected to exceed 1.5 percent next year, according to the OECD.

Spain, with a PPP-based GDP of $2.98 trillion, has also managed a successful rebound.

Spain's potential growth rate stood at just 0.02 percent in 2013, ranking 43rd. It began recovering in 2014 at 0.24 percent, climbed back above 1 percent at 1.13 percent in 2017 and reached 2.12 percent in 2023, lifting the country to 24th place.

Analysts credit an aggressive immigration policy aimed at countering aging and low birth rates, which has boosted labor supply.

Italy, a G7 member with a PPP-based GDP of $3.73 trillion, recorded negative potential growth rates ranging from -0.52 percent to -0.04 percent between 2012 and 2016. It turned positive at 0.11 percent in 2017 and climbed back above 1 percent at 1.03 percent in 2023, aided by a recovery in construction and machinery and equipment investment.

The country the OECD expects to see the most dramatic improvement is Latvia, whose potential growth rate is projected to rise from 1.70 percent last year to 2.09 percent next year, vaulting it from 31st to 18th in the rankings.

India holds an unchallenged first place. The OECD projects its potential growth rate at 6.37 percent last year, 6.34 percent this year and 6.44 percent next year — the only economy in the world forecast to sustain a rate above 6 percent.

The South Korean government has declared this year the starting point for a potential-growth rebound and is working to define concrete policy targets.

Finance Minister Koo Yun-cheol, who also serves as deputy prime minister, presented President Lee Jae Myung with the broad outlines of a "Second-Half 2026 Economic Growth Strategy" centered on reversing the potential growth decline at a Cabinet meeting on May 26.

The strategy rests on four pillars: positioning South Korea among the world's top three AI powers, nurturing the semiconductor sector and new growth engines, delivering visible results from flagship innovation projects, and building regionally anchored growth hubs under the "5 poles, 3 special zones" framework. Detailed plans are scheduled for release later this month.

Experts caution, however, that semiconductor-driven headline growth figures could create a misleading sense of health by obscuring weakness elsewhere in the economy — and that the second-half strategy must be grounded in a clear-eyed assessment of current conditions, given how unpredictable the duration of the chip boom may be.

Some analysts have also suggested that when the government presents its growth strategy alongside macroeconomic forecasts for this year and next, it should publish figures that strip out the semiconductor sector's contribution alongside the headline numbers.

"When analyzing economic growth or export performance, you need to look at the overall figures and the figures excluding semiconductors at the same time — only then can you diagnose the economy correctly and chart the right policy course," said Kim Gwang-seok, head of economic research at the Korea Economic and Industrial Research Institute.

Kim added that the semiconductor boom is not a uniquely Korean phenomenon but a global one, and that South Korean chipmakers are actually losing market share. "The United States and China are investing on an overwhelming scale," he said. "If there are limits to how much of the entire semiconductor value chain we can lead, it is absolutely essential for our growth that we firmly secure the chokepoint technologies and invest aggressively in them."