South Korea's potential growth rate is expected to rise for a second consecutive year this year and next, driven by expanded investment amid a semiconductor boom and productivity gains from the spread of artificial intelligence.
According to the International Monetary Fund's October World Economic Outlook released on the 18th, Korea's potential growth rate is estimated to climb to 2.14% this year and 2.20% next year, from 1.94% last year. It marks the first back-to-back increase in 40 years, since the 1986-1987 period. This year's estimate is the highest in five years, since 2021, when it stood at 2.23%.
The potential growth rate measures how fast an economy can expand on a sustained basis without generating significant inflationary pressure. Unlike the actual growth rate, it is used to gauge an economy's underlying strength, including labor and capital inputs and productivity.
The figures were derived from the IMF's projections for Korea's real gross domestic product growth and its output gap. The IMF forecast Korea's real GDP growth at 3.33% this year and 2.83% next year. The output gap, which shows how far actual GDP exceeds potential GDP, is also projected to widen to 0.548% this year and 1.168% next year.
Korea's growth capacity also ranked relatively high in international comparisons. Among the 27 countries for which the potential growth rate can be calculated using the same method, Korea is expected to rise to seventh place this year and next, from 12th last year. Among the Group of Seven nations, only the United States ranked higher than Korea. Britain, France, Japan and Germany all came in below.
Analysts point to expanded facility investment centered on semiconductors and productivity gains from AI adoption as the main drivers of the rebound. With labor supply difficult to expand in the short term because of population aging and other factors, capital investment and improvements in total factor productivity have lifted growth potential, according to the analysis. Total factor productivity refers to the contribution to economic growth from technological advances and production efficiency, beyond labor and capital inputs.
Estimates vary by institution, however. The Organisation for Economic Co-operation and Development estimated in June that Korea's potential growth rate would decline to 1.66% this year and 1.52% next year, from 1.85% last year. By contrast, the National Assembly Budget Office projected in its "2027 NABO Economic Outlook," released last month, that the rate would rise to 2.22% this year and 2.28% next year, from 2.14% last year.
The IMF also estimated Korea's per capita GDP at $43,512 this year, rising to $52,100 in 2028 to surpass the $50,000 mark. Some analysts say that gives a green light to the government's "3-4-5 economic leap" initiative, which targets a 3% potential growth rate, a place among the world's top four exporters and per capita national income of $50,000. Lee Hyoung-il, deputy prime minister and minister of finance and economy, said he expects exports to top $1 trillion for the first time this year and per capita national income to reach $40,000, adding that investment in three mega projects would lay the groundwork for a rebound in the potential growth rate.