🚨 2026 Economic Growth Forecast 1.8%
Today Korean Economic News for Beginners | 2025.11.21
0️⃣ Base Effect Illusion or Real Recovery?
📌 Expected to Recover to Potential Growth Rate Level... But Need to Consider This Year's Low Growth Base Effect
💬 Korea's economic growth rate forecast for next year is expected to be 1.8-1.9%, recovering to the potential growth rate level. The government announced that next year will be the "first year of growth rate rebound," but experts point out that the base effect from this year's low growth plays a large role. While there are positive factors such as increased semiconductor exports due to AI industry expansion and improved domestic demand, external uncertainties such as export slowdown, global tariff policies, and China's economic slowdown remain risk factors. Experts emphasize that beyond numerical recovery, it is necessary to establish a sustainable growth foundation through productivity improvement and structural reform.
1️⃣ Easy to Understand
There are forecasts that Korea's economy will improve next year. The economic growth rate is expected to reach 1.8-1.9%, which means our economy will recover to the "potential growth rate" level - the stable growth level our economy can achieve.
However, experts are cautious about these numbers. This is because of something called the "base effect." What is the base effect? Let me explain simply.
Student A scored 50 points on the midterm exam. Then they scored 70 points on the final exam. It looks like they did great because their score went up 20 points. But what if Student A's actual ability level was 80 points? Then 70 points is still below their real ability. The final exam score just looks good because the midterm score was so low - this creates an "illusion" effect.
This year's economy is in exactly this situation. Because this year's economic growth rate is expected to be lower than expected, next year's numbers might look like a "big recovery" even with just a small improvement. This is the base effect.
The government announced that "next year is the first year of growth rate rebound." A rebound means something that fell is rising again. But experts say "it's a numerical rebound, but we need to watch more carefully to see if it's a real recovery."
Let's look at the positive and negative factors for next year's economy.
Positive Factors:
First, the AI industry is growing rapidly. As AI services like ChatGPT become popular worldwide, demand for semiconductors needed to run AI is exploding. Korea is a semiconductor powerhouse, so this trend greatly helps our economy. In fact, semiconductor exports from Samsung Electronics and SK Hynix are increasing significantly.
Second, the domestic economy is improving. Domestic demand means consumption within the country. People closed their wallets because prices rose and the economy was bad, but recently consumer sentiment is gradually recovering. The government's fiscal policy is also helping to boost consumption.
Third, construction investment is expected to recover. Construction investment decreased significantly as the real estate market froze, but this is expected to improve gradually next year.
Negative Factors:
First, there are concerns about export slowdown. While semiconductors are selling well, exports of other products are sluggish. Especially as China, our largest export destination, experiences an economic slowdown, overall export growth may weaken.
Second, there's uncertainty in the global trade environment. Many countries including the United States are raising tariffs to protect their domestic industries. This protectionism is a big burden for Korea's economy, which depends on exports.
Third, China's economic slowdown continues. China is experiencing continued economic slowdown due to real estate crisis and weak domestic demand. When China's economy is bad, Korean companies exporting to China are also affected.
So what is "potential growth rate"? Potential growth rate means the maximum growth speed that a country's economy can achieve stably without price increases. Simply put, it's "the speed at which our economy can grow healthily without strain."
Korea's potential growth rate is estimated at about 2%. In the past it was as high as 5-6%, but it continues to decrease due to population aging and productivity slowdown. Next year's growth rate forecast of 1.8-1.9% means recovery to almost the potential growth rate level.
But here comes an important question: "Is recovering to the potential growth rate level enough?" Experts say "it's not enough." Because the potential growth rate itself continues to decrease.
Let me give you an example. If Korea's potential growth rate was 4% ten years ago, it's now 2%. If the actual growth rate achieves 2%, we can say "we recovered to the potential growth rate." But compared to ten years ago, the growth speed is still cut in half.
This is exactly what experts are concerned about. While it looks like recovery in numbers, the growth engine itself is weakening in the long term.
So what do we need to do to achieve real recovery?
First, we need to increase productivity. Productivity is the ability to create more value in the same time. If 100 workers work in a factory, and by introducing new machines and technology they can make more products in the same time, that means productivity has increased.
Second, we need to develop new industries. We need to increase investment in future industries like AI, biotechnology, and green energy. If cars and semiconductors led our economy in the past, we now need new growth engines.
Third, we need structural reform. We need to change inefficient systems and practices, and improve regulations that block innovation. We also need policies like extending retirement age and attracting foreign talent to respond to the aging problem.
In the end, next year's economy may show recovery in numbers, but we need to watch more carefully to see if this is real recovery or temporary rebound due to base effect. Rather than being happy or sad about short-term numbers, it's more important to create a long-term sustainable growth foundation.
2️⃣ Economic Terms
📕 Potential Growth Rate
Potential growth rate means the maximum growth speed that a country's economy can achieve stably without price increases.
- Korea's potential growth rate is estimated at about 2%, continuously declining from 5-6% in the past.
- Population aging, productivity slowdown, and decreased investment are the main causes of declining potential growth rate.
- If the actual growth rate consistently falls below the potential growth rate, it signals that the economy's health is deteriorating.
📕 Base Effect
Base effect is a phenomenon where next year's growth rate appears overestimated or underestimated when the previous year's performance was too low or high.
- When this year's economy is weak, an illusion effect occurs where next year's growth rate looks high even with just a small recovery.
- Conversely, if the previous year's performance was too good, next year's growth rate may look low.
- To remove the base effect and understand the actual growth trend, you need to analyze data from multiple years comprehensively.
📕 Semiconductor Super Cycle
Semiconductor super cycle refers to a long-term boom period when semiconductor demand surges, causing prices and exports to rise simultaneously.
- Semiconductor demand is exploding due to the spread of new technologies like AI, data centers, and autonomous vehicles.
- Korea has world-class competitiveness in memory semiconductors and is expected to greatly benefit from the super cycle.
- However, the semiconductor market has high volatility, so it's uncertain how long the boom will last.
📕 Domestic Demand Recovery
Domestic demand recovery means the economy becomes more active as domestic consumption and investment increase.
- In Korea's export-dependent economy, domestic demand recovery is very important for balanced growth.
- Improved consumer sentiment, government fiscal policy, and employment stability are key factors for domestic demand recovery.
- A strong domestic economy helps the economy remain stable even during external shocks.
3️⃣ Principles and Economic Outlook
✅ Base Effect Looks Like Short-term Recovery But Structural Growth is Different
Numerical rebound and actual growth recovery are different concepts.
First, growth rate increases due to base effect can be an illusion. For example, when the economy sharply contracted during the 2020 COVID-19 pandemic, the 2021 growth rate came out very high. But this was because the 2020 baseline was so low, not because the economy fundamentally became stronger. Next year's growth rate forecast should be understood in a similar context. Because this year's growth rate is expected to be lower than expected, next year's numbers may look good.
Second, to determine if it's real recovery, you need to look at multiple indicators comprehensively. You shouldn't just look at GDP growth rate, but also examine employment rate, wage growth rate, corporate investment, and household income together. If the growth rate rises but jobs don't increase or wages don't rise, the economic feeling may still be bad. Also, the quality of growth is important. Sustainability differs depending on whether growth rate was increased by borrowing money to boost consumption, or by productivity improvement and innovation.
Third, we can learn from past cases. In 1999, right after the 1997 financial crisis, Korea's economy recorded a growth rate over 10%. But this was just recovery from negative growth in 1998, and structural problems remained. Similarly, after the 2008 financial crisis, there was high rebound growth, but growth slowdown came again soon after. History shows that "temporary rebound due to base effect" and "structural growth recovery" are different.
Don't be fooled by numbers and see if the economy's real strength is improving.
✅ Balance Between Exports and Domestic Demand is Key to Growth
Korea's economy grows most stably when exports and domestic demand are balanced.
First, good semiconductor export performance is clearly positive but dependency is too high. About 20% of Korea's exports this year are semiconductors. As AI boom drives semiconductor demand surge, Samsung Electronics and SK Hynix's performance is improving significantly. The problem is that the semiconductor market has very high volatility. In the past, semiconductor booms repeatedly came and suddenly turned to downturns. If we depend too much on one item, semiconductors, the entire economy can be hit hard when the semiconductor market turns down. This is why export diversification is needed.
Second, for domestic demand recovery to continue, income growth must support it. Short-term consumption boost is possible through government fiscal policy, but real income must increase in the long term. Recently, prices rise but wages don't rise as much, so real purchasing power actually decreased in many cases. For example, if nominal wages increased 3% but prices increased 4%, income actually decreased in real terms. For true domestic demand recovery, wage increases through productivity improvement are needed.
Third, construction investment recovery also has uncertainty. Construction investment was greatly reduced due to real estate market downturn, and is expected to recover next year. But this mainly depends on government public investment expansion. Private construction investment is still sluggish. With large household debt burden and uncertain real estate price outlook, it's questionable whether construction investment can continue to recover. Also, as population decreases, housing demand itself is expected to decrease in the long term, so construction investment will be difficult to play the role of leading economic growth like in the past.
Neither exports alone nor domestic demand alone works. Both need to be strong for the economy to grow stably.
✅ Productivity Improvement is Essential to Maintain Potential Growth Rate
To prevent continuous decline of potential growth rate, productivity innovation is desperately needed.
First, working-age population is decreasing due to population aging. Korea is experiencing the world's fastest aging. As people who can work decrease and elderly who need support increase, the entire economy's production capacity is decreasing. From the mid-2020s, the working-age population itself began to decrease absolutely. If people are decreasing but we want to keep growing the economy, one person must create more value. In other words, we need to increase productivity.
Second, technological innovation and automation can be the answer. By introducing AI, robots, and automation systems, more production is possible with less manpower. In fact, productivity is greatly improving in manufacturing through smart factory introduction. In service industries, unmanned stores, delivery robots, and AI customer service are spreading. But this innovation is centered on large companies, and small and medium-sized enterprises and self-employed people still remain at low productivity. Innovation benefits must spread throughout the economy to prevent potential growth rate decline.
Third, regulatory reform and institutional innovation are also important. Even with good technology and ideas, they often can't be realized due to complex regulations. For example, new services like autonomous vehicles, drone delivery, and telemedicine can't develop properly because they're blocked by regulations. We need to create an environment that promotes innovation by finding balance between safety and regulations. Also, the education system must change. We need to shift from memorization-focused education to education that develops creativity and problem-solving skills to cultivate talent that will lead future industries.
In an era of decreasing population, there is no growth without productivity improvement.
4️⃣ In Conclusion
Next year's economic growth rate is expected to be 1.8-1.9%, showing recovery in numbers. The government's declaration of "first year of growth rate rebound" is based on this forecast.
However, experts are cautious. The base effect plays a large role because this year's economy was more sluggish than expected, making next year's numbers look good. We need to distinguish whether the economy's real strength has improved or whether it just looks high due to a low baseline.
There are clearly positive factors too. Semiconductor exports are doing well due to AI industry expansion, domestic economy is gradually improving, and construction investment is expected to recover. These factors will boost next year's growth rate.
But risk factors are also significant. Export slowdown concerns, spread of global protectionism, and China's economic slowdown can hinder economic recovery. Especially with high dependency on one item, semiconductors, the entire economy could be hit if the semiconductor market turns down.
The more fundamental problem is that the potential growth rate itself continues to decrease. The speed at which our economy can grow healthily is decreasing due to population aging, productivity slowdown, and decreased investment. Even if next year's growth rate recovers to the potential growth rate level, the problem is that this potential growth rate is much lower than in the past.
So how should we respond?
The government and companies should not rely only on short-term stimulus measures but focus on productivity improvement and structural reform. They should promote technological innovation, improve regulations, and develop new industries. Also, they should innovate the education system to cultivate future talent and actively attract foreign talent.
From an individual perspective, you should carefully plan asset strategies according to economic trends. Semiconductor-related companies are expected to do well for the time being, but diversified investment is important due to high volatility. While domestic demand recovery is expected, you should keep in mind that it will be difficult to sustain without income growth support.
Investors should not focus only on short-term profits but find truly competitive companies from a long-term perspective. You need insight to distinguish between temporary rebound due to base effect and structural growth.
In the end, next year's economy will show numerical recovery, but whether this is the start of true rebound or temporary illusion will only be known with time. What's important is not being happy or sad about numbers, but continuing efforts to strengthen the economy's fundamental strength. Only then is sustainable growth possible.
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