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Korea's economic growth potential has been on a downward spiral due to the toxic mixture of a low birthrate, aging population and low productivity, the central bank said Monday.
It forecast a continued decline as such structural issues are combining to hamper productivity compounded by external uncertainties including the trade feud between the U.S. and China.
Experts said that corporate investment to increase capital and continued efforts to enhance labor productivity and efficiency are among the long-term solutions to help Asia's fourth-largest, export-reliant economy become less vulnerable to global shocks, economists said.
According to the Bank of Korea, the nation's potential growth rate is estimated to have fallen to an annual average of 2.5 percent to 2.6 percent between 2019 and 2020 due to a fall in working population and sluggish investment.
Economic growth potential is the gross domestic product (GDP) growth that can be achieved without causing inflation. A failure to achieve this would mean the economy will have difficulty growing without triggering inflation in the future.
The annual average growth potential stayed above the 5 percent range until 2005, but it fell to 4.1 percent from 2006-2010, 3.2 percent between 2011 and 2015 and 2.7 percent from 2016 to 2020.
The BOK said the potential growth rate is falling faster than previously thought because the labor input was smaller than previously estimated amid a slower-than-expected economic activity participation rate.
"The economy, currently underperforming the potential growth rate, continues to remain sluggish due to the U.S.-China trade feud and slowdown in the semiconductor industry, among other factors," the BOK said.
The rate will be on a continued decline, it added, due to a sharp drop in the number of young, working-age people amid the low birthrate in a fast-aging society.
Other factors dragging down the figure include weak investment ― which it views as increasingly becoming a tendency ― and pillar industries no longer generating as much profit as they used to.
Heightened uncertainties in the global and domestic markets are also a negative factor.
The government should put top priority on measures to increase capital and boost labor productivity to prevent what is likely to be smaller in the coming years, according to Yun Chang-hyun, an economist at the University of Seoul.
"The low birthrate is a problem for which there is no short-term solution. So the answer is to boost corporate investment and productivity via creating a business environment by promptly removing heavy, unnecessary regulations," he said.
The government should map out a long-term plan to help businesses ― both foreign and domestic ― stay motivated and not discouraged, he added.
"Uncertainty in the business environment is the biggest risk threatening corporate competitiveness. The country needs to adopt global standards involving the environment and labor sectors, thereby boosting business confidence that their profit will not be hurt by factors other than their individual merits," he said.
Family-friendly policies should be introduced and enforced to help increase female workforce participation, he added.
"Many female workers are held back due to widespread notions that once they are left behind, they will not catch up again, which is true. Social benefits should be strengthened to help them manage child rearing and work," he said.
