South Korea bad demographics but a strong, resilient economy

Of the G20 economies, South Korea has the worst demographic prospects, worse even than Japan, on some measures.

The ‘medium variant’ of the United Nations’ latest population projections sees the overall population halving in the next sixty years. The population of working age is set to decline to an even greater extent, by far the greatest decline of any G20 economy. The medium variant allows for some immigration, but on the United Nations estimates that has relatively little effect.

One important study, by Michael Clemens at the PIIE, is more optimistic on the extent to which immigration can prevent this decline. He sees enhanced labour migration to Korea is necessary, sufficient and feasible to avoid the decline into low or negative economic growth which many expect. That is a lesson not just for Korea but for other advanced economies facing an ageing, shrinking population.

Given that population trends (the total population and the population actually working) is the key driver of long-term economic growth, the concerns are very real.

Even so, 2026 is proving to be a strong year so far. GDP growth in 2026 Q1 was very strong - the fastest rate since the recovery from Covid. The strength was driven by exports, especially of chips. Korea's competitiveness is enhanced by the relatively weak won, which is undervalued against almost all PPP measures.

This strength should continue in the rest of the year. The central bank sees AI-driven chip demand outweighing the drag from the Iran war.

Korea has a strong fiscal position with debt under 60% of GDP and the budget expected to be close to balance in next 5 years. The external position is similarly strong, with a large current account surplus and net foreign asset position.

A perennial vulnerability of the Korean economy, however, is strong credit growth. Private sector credit remains high relative to GDP. Broad money growth is still strong. These easy conditions have meant that metropolitan house prices have remained strong. The new central bank governor, Shin Hyun-song has said an increase in the base rate is likely later in the year.

The won is substantially undervalued on three PPP measures.