October 30, 2024

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South Korea logged one of the sharpest falls in its potential growth rate over the past two years among advanced economies, data showed on Nov. 3.

The country’s potential economic output was estimated at 2.7 percent for this year, according to the Organization for Economic Cooperation and Development.

Potential output refers to the maximum growth that a given economy may 
achieve over the medium to long term without taking inflation into account.

The latest figure, though slightly higher than the 2.5-2.6 percent range suggested by the Bank of Korea, marked a 0.4 percentage point fall from the OECD’s earlier estimates in 2017.

Among the 36 member states of the organization, this was the third-steepest drop during the two-year period, next to Turkey and Ireland. It was also the first time that the OECD projected Korea’s growth potential to be below the 3 percent mark.

Up until the Asian financial crisis in 1997-1998, Asia’s fourth-largest economy had posted economic growth of over 7 percent. The figure sank to the 4-5 percent range in the early 2000s and further down to 3.9 percent in 2008 amid the global financial crisis.

Most advanced economies, however, saw their growth potential rise over the past two years. The corresponding figure for the United States for this year stood at 2 percent, up from the 1.9 percent projected in 2017.

The OECD’s revised estimation added concerns that the government’s expanded fiscal spending and the central bank’s rate cut may be insufficient to revitalize the slowing economy.

In its September working paper titled “What happens if central banks misdiagnose a slowdown in potential output,” the International Monetary Fund warned that central banks’ easing actions may revive gross investment but will not revive growth itself.

Citing past cases of Japan in the 1990s, the United Kingdom, the eurozone and the United States in the 2000s, the IMF pointed out that policymakers have often failed to detect the slowdown in potential growth pace and hoped to boost the real economy to the supposed potential growth level through rate cuts.

Domestic experts, too, expressed worries that expansionary policies may send out a wrong signal about the economic reality.

“Responding to the slowing economy, Japan adopted a series of powerful short-term expansionary policies and saw some improvement for a while, but this did not last long,” said Kim So-young, professor of economics at Seoul National University.

“Short-term reflation measures may bring temporary positive impact but they also involve the risk of deception as it blinds people from facing the actual declining trend of the economy.”

By Bae Hyun-jung/The Korea Herald (tellme@heraldcorp.com)