Banks Lift South Korea Growth Forecasts After Q1 Surge, but Potential Growth Seen Sliding

Global investment banks have been raising their forecasts for South Korea’s growth after a surprise first-quarter jump, but economists warn the country’s underlying growth capacity continues to weaken, with potential growth projected to fall into the mid-1% range next year.

According to government-related sources on April 26, major investment banks recently revised up their outlooks for South Korea’s growth. JPMorgan lifted its forecast to 3.0% from 2.2%, an increase of 0.8 percentage points, and Citi raised its estimate by 0.7 points to 2.9%. Both are well above the government’s 2.0% growth target presented early this year.

The upgrades largely reflect the first-quarter “surprise” result. The Bank of Korea said on April 23 that real gross domestic product grew 1.7% from the previous quarter. It was the strongest quarterly growth since the third quarter of 2020, when the economy expanded 2.2%, marking the highest level in five years and six months.

Some analysts cautioned the surge may prove temporary. They pointed to base effects after last year’s unusually weak growth, combined with a stronger semiconductor cycle and currency-related factors.

Measures of the economy’s fundamentals, however, show a weakening trend. The Organization for Economic Cooperation and Development projects South Korea’s potential growth rate will fall to 1.71% this year from 1.92% last year, a decline of 0.21 percentage points, and then slip further to 1.57% next year.

Potential growth refers to the maximum pace an economy can sustain without stoking inflation while fully using labor and capital. South Korea’s potential growth has been declining since 2012, when it was 3.63%, and fell below 2% for the first time last year. If the trend continues, it would extend the decline to 15 consecutive years through next year.

Analysts attribute the slide to structural factors including low birthrates and rapid aging that reduce labor and capital inputs, along with slower productivity gains. They say a short-term growth surprise is unlikely to reverse the trend, and some have raised concerns about a growth model heavily reliant on semiconductors.

Jeon Gyu-yeon, an analyst at Hana Securities, said the jump reflects the semiconductor upturn but also that negative effects from the war in the Middle East have not yet been fully felt. “With weaker consumer sentiment and higher raw material prices, private consumption and construction investment are likely to slow,” Jeon said. He added that after the Strait of Hormuz is reopened, a surge in crude oil imports could sharply weaken the contribution from net exports.