South Korea's potential growth rate, which had sunk to the 1% range, will rise for two consecutive years this year and next for the first time in four decades, the International Monetary Fund projects. According to the IMF's October World Economic Outlook released on the 18th, Korea's potential growth rate is estimated to rebound to 2.14% this year and 2.20% next year from 1.94% last year. Potential growth, a gauge of an economy's underlying strength, is made up of labor, capital and total factor productivity. Given that labor reform has made little headway and the population continues to age, the improvement appears to stem from expanded facility investment centered on semiconductors and productivity gains from the spread of artificial intelligence. Korea's potential growth rate fell from 2.06% in 2023 to the 1% range in both 2024 and 2025, and is now returning to the 2% range this year. It is the first back-to-back increase since 1986-87, the years of the "three lows" boom.
The rebound is undeniably welcome news. But it rests on an exceptional boom in semiconductors, which account for half of total exports. Optimism that this trend will simply continue should be treated with caution. Korea is enjoying an export windfall on the back of a memory chip bonanza for now, but if the super cycle breaks, not only chipmakers but the entire economy could suffer severe pain. The Korea Development Institute has warned that Korea's long-term growth rate could turn negative around 2030 — a caution that the divide between chip-driven industries and the rest could deepen further.
This is no time for self-congratulation over a short-term upturn in potential growth. It should instead be treated as a window to improve the economy's fundamentals and lay the groundwork for sustainable growth through structural reform, including greater labor flexibility and more jobs for young adults, along with regulatory overhaul and the development of next-generation growth engines. With China's relentless push into semiconductors, U.S. pressure for investment and European Union import controls, trade conditions and external variables are turning increasingly unfavorable and could trip up exports at any time. The Lee Jae-myung administration should bear in mind that its economic record will hinge on whether it settles for the chip boom or uses it as leverage for a quantum leap.