The Organisation for Economic Co-operation and Development and the Asian Development Bank have sharply raised their growth forecasts for South Korea this year to above 3%. In its interim economic outlook released on the 23rd, the OECD put the country's growth rate at 3.7%, a full 1.1 percentage points above its June projection. The ADB, which had forecast 1.9% in April and 2.6% in July, revised its estimate to 3.2% the same day. With the Bank of Korea and the Korea Development Institute projecting 3.3% and 3.2% respectively, expectations at major international organizations are converging on the 3% range. Global investment banks including JPMorgan, at 3.8%, also see growth in the high 3% range. Exports are enjoying a boom strong enough to approach $1 trillion this year on the strength of semiconductors, so there is reason for optimism.
The problem is the structural shadow hidden behind the jump in the headline number. According to the Bank of Korea, one in five companies subject to external audit last year faced difficulties so severe that operating profit could not cover interest payments for three straight years. The delinquency rate among vulnerable household borrowers climbed above 10% as of the end of June. As the warmth of growth stays confined to a few industries, most economic actors are being pushed to the brink, deepening a K-shaped divide. The frailty concealed by the semiconductor illusion shows up plainly in a falling potential growth rate. The OECD earlier projected that Korea's potential growth, which came to just 1.85% last year, would fall to 1.66% this year and 1.52% next year. Unlike the surging headline growth rate, in other words, the underlying strength of the Korean economy is weakening by the day.
Growth above 3% can be derailed at any moment by external variables such as a global shift toward tightening, geopolitical risk and tariffs originating in the United States. Achieving "real growth" requires lifting a potential growth rate that has fallen below 2%. Lee Hyoung-il, deputy prime minister and minister of finance and economy, has also identified a rebound in potential growth and an end to polarization as his top priorities. A growth strategy that leans on fiscal spending, however, may bring more side effects than results. Building a foundation for sustainable growth means nurturing future growth engines, including the three mega-projects. The government must also move faster on structural reform in areas such as labor and education, on dismantling outdated rules and on revitalizing industrial ecosystems in order to transform the economy's constitution. Sustained effort is needed to make population policy a priority as well, so that a rare upturn in births does not prove temporary.
