South Korea's potential growth rate set for first back-to-back rise in 40 years on semiconductor boom

South Korea's potential growth rate is expected to rise for two consecutive years for the first time in four decades, according to the IMF's October World Economic Outlook.

The IMF projects the country's potential growth rate at 2.14% this year and 2.20% next year, up from 1.94% last year. If the forecast holds, it would mark the first back-to-back annual increase since 1986–1987, when the country was riding the so-called "three lows boom" of low oil prices, low interest rates and a weak dollar. The trend suggests that South Korea's medium- to long-term growth capacity — which had been eroding due to an aging population and other structural pressures — is now recovering on the back of a semiconductor-driven surge.

This year's reading represents a 0.20 percentage-point rebound, with a further 0.06-point gain projected for next year. The rate had slipped from 2.06% in 2023 to 1.96% in 2024 before climbing back above 2% this year.

Potential growth rate measures the pace at which an economy can expand without stoking inflation — essentially the growth rate of potential GDP, the maximum sustainable level of output. Unlike actual GDP growth, which can be temporarily inflated by stimulus, it reflects the economy's underlying productive capacity.

A rebound in this figure signals an unusual expansion of growth capacity despite structural constraints such as an aging population and a shrinking labor supply.

The estimates were derived by back-calculating from IMF projections for South Korea's real GDP and its output gap — the degree to which actual GDP exceeds or falls short of potential GDP. The IMF forecasts South Korea's real GDP growth at 3.33% this year and 2.83% next year, with output gap readings of 0.548% and 1.168%, respectively.

Applying the same back-calculation method to historical IMF data, the last time South Korea's potential growth rate rose in two consecutive years was during the three-lows boom of 1986–1987, when it climbed from 9.67% in 1985 to 9.77% in 1986 and 9.91% in 1987.

There were isolated single-year rebounds — in 2010 following the global financial crisis and in 2021 due to the COVID-19 base effect — but neither was sustained into the following year.

South Korea's potential growth rate has been on a long downward trajectory. It fell from 4.05% in 2010 to 3.67% the following year, dropped below 3% to 2.97% in 2018, and slid to 1.28% in 2020. This year's estimated 2.14% is the highest since 2021, when it stood at 2.23%.

Among the 27 countries for which the potential growth rate can be calculated using the same methodology, South Korea ranks seventh both this year and next — up from 12th last year. This year, only Malta (4.10%), Cyprus (3.39%), Denmark (2.68%), Slovenia (2.53%), Spain (2.50%) and the United States (2.33%) rank higher.

The same six countries lead next year as well: Malta (4.04%), Ireland (3.88%), Cyprus (3.29%), Slovenia (2.53%), Denmark (2.34%) and the US (2.29%).

Among G7 nations, the US is the only country with a higher potential growth rate than South Korea. South Korea comfortably outpaces major advanced economies including the United Kingdom (1.29% this year, 1.26% next year), France (0.85%, 0.85%), Japan (0.82%, 0.84%) and Germany (0.64%, 0.70%).

South Korea's output gap ranking — the basis for the potential growth rate estimate — has also surged, jumping from 20th last year at -0.610% to sixth this year at 0.548%, and is projected to reach first place next year at 1.168%, well ahead of second-place Greece (0.750%) and third-place Denmark (0.737%).

The government laid out a "3·4·5 economic leap" vision in its second-half economic growth strategy announced in July, targeting a potential growth rate of 3%, a top-four ranking in global exports and per-capita national income of $50,000.

With strong semiconductor exports now joined by a rebound in the potential growth rate — long considered the hardest of the three targets to achieve — the government's goals appear increasingly within reach. The IMF projects South Korea's per-capita GDP at $43,512 this year, clearing the $40,000 threshold.

The fund sees per-capita GDP reaching $49,277 next year and surpassing $50,000 to hit $52,100 by 2028, before approaching $60,000 at $59,919 in 2031.

The IMF also sounded a note of caution, flagging a potential reversal of the semiconductor-driven growth momentum. Among the key downside risks, it cited a "reassessment of AI-related expectations," warning that if the anticipated gains in AI-driven profitability and productivity prove overly optimistic, investment in AI infrastructure and technology could slow sharply.

"Stock markets with high concentrations of AI-related firms could be vulnerable to broad-based price corrections," the IMF said, adding that recent volatility in technology shares in countries such as South Korea and the United States illustrated the risk.

The fund further warned that the fallout could spread through reduced global demand for technology goods and services, lower capital inflows into economies integrated into AI supply chains, and losses on overseas portfolio investments. It also flagged circular financing structures within the AI ecosystem and rising leverage as additional risk factors.