The probability of Korea experiencing negative growth has tripled compared to 10 years ago. This is due to a declining potential growth rate and vulnerability to external shocks. The Bank of Korea warned that structural reforms are urgent to strengthen growth momentum and respond to aging.
On the 10th, the Bank of Korea noted in a post on its official blog titled "The rapid decline of our economy's fundamental strength requires improvement" that the probability of our country facing negative growth has increased from an average of 4.6% in 2014 to 13.8% last year. This was calculated by analyzing data from the previous five years, excluding crisis situations such as the COVID-19 pandemic.
According to the Bank of Korea, negative growth occurred once in the 2010s (in the 4th quarter of 2017), but in the 2020s, five instances of negative growth have occurred so far due to various internal and external shocks, in addition to economic crises such as COVID-19.
The Bank of Korea stated, "The increase in negative growth is the result of structural factors influenced by cyclical factors, a decline in domestic growth potential, and vulnerability to external shocks," adding, "We need to increase potential growth rates and reduce economic volatility through structural reforms."
Potential gross domestic product (GDP) refers to the maximum level of production that can be achieved without causing inflation by mobilizing all production factors such as labor, capital, and resources in a country. The potential GDP growth rate of Korea has plummeted from 5% in the early 2000s to around 2% recently. This decline is primarily due to structural factors such as a decrease in the working-age population, declining industrial competitiveness, and high external dependence.
Cases among major advanced and emerging countries show that the lower the average growth rate, the higher the frequency of negative growth. According to the Bank of Korea, countries like the United States, where quarterly growth rates exceed 0.5-0.6% (annualized around 2%), have a stable frequency of negative growth. However, countries like Japan, where quarterly growth rates have dropped to 0.2-0.3% (annualized around 1%), have seen an increased frequency of negative growth.
The Bank of Korea emphasized the need for long-term structural reforms aimed at increasing potential growth rates and reducing economic volatility, along with short-term responses to economic conditions. Additionally, the Bank advised strengthening efforts to increase new growth engines, respond to low birth rates and aging, and create a robust economic structure against external shocks through domestic revitalization and export diversification.