Seoul: Bank of Korea (BOK) Governor Rhee Chang-yong warned that South Korea's potential growth rate could fall to the zero percent range by the 2040s, emphasizing the necessity for efficient financial resource allocation to enhance growth potential. Rhee delivered these remarks during a speech at a BOK symposium co-hosted with the Korean Finance Association in Seoul.
According to Yonhap News Agency, the BOK chief highlighted that the country's potential growth rate, which was around 5 percent in the early 2000s, has recently decreased to below 2 percent. He attributed this decline to low birthrates and rapid population aging, which have diminished the working-age population. Additionally, insufficient corporate investment and innovation have not adequately countered these trends.
Rhee also criticized the "inefficient" allocation of resources that has hindered capital from reaching high-productivity sectors. He stressed the crucial role of finance as an infrastructure that reallocates limited resources to efficient sectors, which can drive innovation and productivity growth.
According to a BOK analysis, South Korea could enhance its long-term economic growth rate by reducing the share of household credit relative to gross domestic product (GDP) and redirecting funds toward productive sectors like corporate lending. A simulation using data from 43 countries from 1975 to 2024 indicated that decreasing the household credit to GDP ratio by 10 percentage points from the current 90.1 percent could increase the nation's long-term annual growth rate by 0.2 percentage point.
The BOK stated that the impact would be more significant when credit is allocated to small and medium-sized enterprises (SMEs) and highly productive firms, while lending to the real estate sector contributes minimally to macroeconomic growth. In its latest outlook released last month, the BOK adjusted its growth projection for this year upward by 0.1 percentage point to 1 percent, and it forecasts a 1.8 percent expansion for 2026. Despite this revision, the growth forecast for this year remains below the country's estimated potential growth rate of around 1.8 percent, which is the maximum pace at which the economy can expand without causing inflation.