Demographic changes tied to economic growth

London, 29 Feb 2016

Global economies need to find new ways to boost production as low birth rates and ageing populations contribute to a declining labour force.

Demographic trends are shaping economies the world over and patterns not previously seen are emerging.

"These trends are driving economies globally," says Macquarie Investment Management Executive Director, Dean Stewart.

Economic growth is traditionally thought of as cyclical. Boom times are followed by fallow periods; then economies recover, growth resumes and the cycle begins again. 

However that pattern has been broken in recent years, which have seen persistently low interest rates and government stimulus in an attempt to kick-start growth, yet economies remain stubbornly sluggish.

In the US, economic growth is slow but unemployment and labour participation – the amount of people in the workforce – are low too. Low unemployment is traditionally associated with strong growth and high labour participation.

There have also been unexplained changes in debt levels. Despite years of zero interest rates, private debt has been flat or declining since the financial crisis, a situation not seen since the end of the Second World War.

A major contributor is the rising number of retirees and elderly citizens in major economies, he says, which is affecting both consumption and productivity.

Chinese growth has also moderated, with recent economic data showing growth has dropped below 7 per cent.

Stewart says changing demographics are behind these unusual economic trends.

A major contributor is the rising number of retirees and elderly citizens in major economies, he says, which is affecting both consumption and productivity.

"Between the ages of 20 and 65, your contribution to society changes quite gradually but there is a really dramatic change when you hit retirement, probably the biggest change in your adult life," explains Stewart.

Retirees typically rein in their spending and downsize from larger homes purchased during their working years. They go from being highly productive members of society during their 40s and 50s and stop producing almost completely in retirement. When this happens across a nation or continent, the effect on economic growth can be highly significant.

"The working age population (aged 20-64) began to decline in 1995 in Japan, in 2010 in Europe, and in 2015 in China.  In each of these instances, the affected countries suffered major economic slowdowns," says Stewart.

"The growth in the working age population has been trending lower in Australia and the US too, as well as countries such as Singapore, Malaysia and Korea."

"In the face of such powerful demographic changes, monetary stimulus has a limited effect. But urbanisation and globalisation can help."

Faced with a shortage of labour, countries have to find alternative sources or alternative methods to boost production.

These alternative methods include technology and robotics, both of which are likely to be increasingly used over the coming years, explains Stewart.

"Alternative sources tend to involve offshoring and immigration – in other words, richer nations sourcing labour from poorer nations. These actions increase global labour productivity dramatically."

"This is globalisation at work – and it is helping both developed and developing markets to combat the impact of ageing and retiring populations."

Urbanisation is also a strong tool in the economic armoury.

"This can also boost sluggish economies because people contribute more to GDP growth when they move from the country to a city," says Stewart.

"They become more productive and they consume more goods and services. This phenomenon occurs when people move from poor countries to wealthier ones too."

The US and Australia, for example, face milder demographic challenges than parts of Europe because immigration is bolstering their productivity.

In the east, growth in China and other Asian nations will drop less rapidly because they are beneficiaries of the west’s outsourcing of labour. Workers are moving to urban centres and lifting productivity.

Despite these shifts most nations will have to become used to a new paradigm.

As population growth continues to slow in most countries across the globe, sluggish economic growth and low inflation are likely to be the norm for the foreseeable future. 

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