The OECD projects South Korea's potential growth rate at 1.66 percent this year and 1.52 percent next year, with the figure expected to slide further to 1.46 percent in the fourth quarter of next year — the lowest level on record under OECD measurement standards. The rate stood at 1.85 percent last year and has been declining annually. The potential growth rate measures the maximum pace at which an economy can expand without stoking inflation. Strong semiconductor exports have lifted this year's headline growth forecast to 2.6 percent, but the underlying strength of the economy is moving in the opposite direction.
Just six months ago, the OECD estimated Korea's potential growth rate at 1.71 percent this year and 1.57 percent next year, with the fourth quarter of next year still expected to hold just above 1.5 percent at 1.52 percent.
Instead, the organization cut both estimates by 0.05 percentage points and trimmed the fourth-quarter figure for next year by 0.06 percentage points. Korea's ranking among 47 major economies is also slipping. As recently as 2024, the country sat in the mid-teens; last year it fell 13 places to 28th. It is projected to drop further, to 31st this year and 32nd next year.
The low birth rate and aging population — the most frequently cited causes of the decline — cannot be fixed quickly. That leaves business investment and productivity gains as the only viable remedies. The investment climate, however, is deteriorating. Domestic companies have been diversifying their production bases toward the United States and Southeast Asia in response to global supply chain realignment, an unavoidable shift that inevitably reduces the share of investment staying at home. On top of that, the so-called Yellow Envelope Act threatens to deepen the chill. By broadening the scope of collective bargaining and industrial action against prime contractors, it significantly raises the burden on businesses. Calls for companies to share a portion of operating profits with workers could also weigh on investment decisions.
Businesses go where conditions favor investment, and Mexico's trajectory offers a telling lesson. Mexico once posted a lower potential growth rate than Korea, but of late the picture has changed. As US-China tensions intensified and global supply chains were redrawn, Mexico absorbed a surge of production relocations, driving a rapid rise in foreign direct investment. Geographic proximity to the United States, combined with a business-friendly regulatory environment, powered the turnaround. As its manufacturing base broadened, so did its growth momentum. The OECD projects that if current trends continue, Mexico's potential growth rate could surpass Korea's around 2027.
The government has pledged to make this year the starting point for a rebound in potential growth. More business investment means more jobs, higher productivity and, ultimately, a recovery in growth capacity. Above all, what matters is creating conditions in which companies can commit to long-term investment in Korea. Regulatory reform that loosens the constraints on business can no longer afford to move slowly.
