The Korea Herald


[Editorial] Negative growth in 2040s

The Korean economy keeps chugging along but the long-term outlook remains gloomy

By Korea Herald

Published : June 12, 2024 - 05:30

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South Korea’s current economic performance is not spectacularly impressive, but it is not so bad in a way that heralds serious trouble -- at least for now. The long-term outlook, however, suggests that something dramatic should be done to avoid a crisis stemming from a shrinking workforce and the dearth of innovative products.

The Korea Development Institute said Tuesday in a monthly report that the Korean economy was showing some signs of improvement in the strength of export growth, though domestic demand remains sluggish.

Korea’s semiconductor exports have been on a robust recovery path thanks to the modest growth of the global economy, the KDI said. The country’s exports continued its growth trend for eight straight months until May, driven largely by the pickup in chip sales, a key item for the export-dependent economy.

But the high interest rates affecting household and business loans continue to weigh on domestic demand, the think tank said. The Bank of Korea froze its benchmark rate at 3.5 percent for the 11th straight session last month. The central bank showed its intention to end the monetary tightening cycle late last year but remains cautious as to when it will start cutting the rates.

Meanwhile, the BOK data showed Tuesday the country’s current account swung to a deficit of $290 million in April, marking a turnaround after recording 11 straight months of surplus. But Korea’s current account balance is expected to return to the black in May, as the deficit in April was caused by seasonal factors such as overseas dividend payments, the central bank said.

In the first four months of the year, the country's current account surplus grew to $16.55 billion, a clear improvement from a year earlier when the country saw a deficit of $7.33 billion.

But there are shifting signs. Korea’s exports, after rising 11.7 percent on-year to $58.1 billion in May, fell 4.7 percent to $14.6 billion during the first 10 days of June, according to the data from the Korea Customs Service.

The recent ups and downs of the broad economic data may not warrant a big change in policies and strategy on the assumption that the recovery in the semiconductor sector will continue to bolster Korea’s exports and consumer prices, which rose 2.7 percent in May from a year earlier, will stabilize in the coming months.

But a decision to stay the course could be a serious mistake in the long term, given a flurry of warning signs that suggest a gloomy future for the Korean economy at large. If the government and lawmakers remain complacent about the latest economic figures and turn a blind eye to growing risks, it may be too late to fix debilitating economic problems and avoid a slippery slope a couple of decades later.

In a report released Monday, the BOK projected that the Korean economy could start shrinking about 10 years from now, unless the country tackles its demographic crisis and achieves productivity growth through innovation.

The central bank's Economic Research Institute said that Korea could fall into a pattern of “negative growth” in the 2040s if the country fails to carry out dramatic changes to reverse a plunging birth rate and improve its lackluster productivity level.

At the heart of the depressing outlook is the country’s ultra-low birth rate. Korea’s total population, after peaking at 51.84 million in 2020, is forecast to decline to stand at 50.06 million in 2040 and 37.18 million in 2070. The report said Korea’s corporate productivity growth rate -- a factor needed to help deal with demographic challenges -- fell from an average of 6.1 percent in 2001-2010 to a mere 0.5 percent in 2011-2020.

As the report proposes, Korea has to strengthen basic research, improve venture capital supply and create better conditions for innovative entrepreneurs not only to shore up productivity but also to avoid a looming multi-faceted crisis.