Aging Demographics to Crunch Global Growth

Yves here. I don’t mean to make an object lesson of the author of this piece, van Onselen, since the point he is making, about demographics as a driver of growth, is valid from the vantage point he is taking (that of investment time horizons, which by nature are comparatively short).

But this perspective is simultaneously frustrating to contend with. First, the discussion of dependency ratios (the ratio of people in the income-producing part of the economy versus those no longer earning a paycheck, such as children, students, and retirees) assumes that people of normal working age can actually find work. In virtually all advanced economies, that still is not the case, and is not going to be the case any time soon. So worrying about dependency ratios shouldn’t even be a first order concern; what about getting people who want a job some employment?

And the dirty secret there in the US, and I suspect again in a lot of advanced economies, was that there was a lot of un and under-employment even prior to the bust. I can tell you in my cohort I know of way too many people who retired early (as in far more modestly than they wanted to) or were working part time not by choice. These were all people with advanced degrees and strong to very impressive resumes. Basically, if you are older and have any real skills and fall off the corporate/big institutional ladder, the drop is far indeed. If you don’t want to work in retail or some other terribly temp-ish job, you face erratic at best employment at something that might suit your skills (another route I’ve seen people take is buying a franchise, but not everyone either has the dough or if they have it, are willing to risk it).

Second is I’m not sure we’d see lower dependency ratios if we had enough jobs. While there are a lot of jobs that are still taxing enough physically to necessitate retirement by 65, and rising diabetes will also curtail some career lengths, lots of people who comment on the blog clearly intend to work past 65 if they can because they must. They don’t have enough stashed away to retire.

Another issue is we really DO need to figure out, at least for one or probably several transitional generations how to live with higher dependency ratios, because that’s what you get if you stabilize or shrink the global population which we desperately need to do if we are to have anything resembling civilization 150 years from now. We used to have a lot more people working in the non-paid economy, most importantly wives (who used to do a lot of physical labor) and to a lesser degree, older women and men (the extended family living model).

And related to the “non-paid economy” question gets back to the notion of growth. Businesses want growing income levels because investors want returns to rise over time. Large organizations are easier to run if the empire is growing (more of the young bucks see more potential; one might argue that Game of Thrones illustrates the sort of struggles you see over a static pie). Growth has tended to mean “rising living standards” but have they really risen when we have more pollution, more mental health problems and more obesity?

By Leith van Onselen, Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. You can follow him on Twitter at @leithvo. Cross posted from MacroBusiness

Over the past few years, I have written a series of articles arguing that the ageing of populations across the globe would have major adverse implications for consumption spending, asset values, and government revenues and taxation.

I have also argued that the impacts from ageing would likely be most acute in Western Nations, although some developing countries, most notably China, would also be negatively affected.

The problem stems primarily from the coming end of the demographic ‘sweet spot’. That is, where there is a high proportion of working age people supporting only a small pool of dependents. Such an advantageous age structure has effected almost all of the world’s major economies and produced a population structure optimal to economic growth – that is, where the largest segments of the population were neither young nor old, but in the middle (i.e. working age).

These demographic sweet spots can be seen in the below charts, which show the dependency ratios of each major economy – i.e. the ratio of the non-working population, both children (< 20 years old) and the elderly (> 65 years old), to the working aged population.

In the Anglosphere, of which Australia is a part, the dependency ratios fell steadily in the decades to 2010. However, in the decades ahead, their dependency ratios are projected by the United Nations to rise steadily as the baby boomers retire and their populations age:


In some major European countries, as well as Japan, their populations aged earlier and their dependency ratios bottomed in the 1990s, which might help to explain some of the economic malaise currently being experienced across those regions:


Earlier this month, Index Universe published an interesting report estimating the impact of population ageing on a wide range of economies. And the results aren’t pretty:

…until recently 3–4% growth in real GDP was considered “normal.” So it should come as no surprise that the economic performance of the past few decades has strongly influenced expectations about economic growth. However, when optimistic expectations get detached from reality we risk creating a significant expectations gap—a disconnect between what we take for granted given our recent experiences and what we should anticipate given simple arithmetic.

…favorable trends in the size and composition of populations have helped to fuel the rapid economic growth experienced in the developed world over the past 60 years, and their reversal plays a crucial part in the current rapid deceleration in developed world growth…

We forecast growth in Real Per Capita GDP (holding everything else constant) for every five-year interval between 1950 and 2050, based on the demographic linkages observed in the 1950–2010 data spanning 22 countries. These are not “normal” GDP growth rates, they are abnormal GDP growth rates, reflecting the impact of a demographic tailwind or headwind…


All 12 countries will confront varying speeds of demographic headwinds in the coming decades, first in the developed economies, then in the older emerging economies (China and Russia), and finally in the younger emerging economies (Brazil and India). These headwinds get stronger over time and appear to stabilize in the developed world and the older emerging economies only after about 2040. For the younger emerging economies, the demographic headwinds do not become acute for perhaps another 20–30 years.

All 12 countries enjoyed demographic tailwinds during the past 60 years, so these headwinds will feel more obstructive than they are. It is human nature to consider our personal experience to have been “normal,” so we evaluate subsequent events in comparison with this self-referential “norm.” If the people of Japan consider the former tailwind of 2–3% to be “normal,” then a future 2% headwind will feel like a ponderous 4–5% drag, relative to expectations. On average, the countries in this analysis enjoyed benign demographic profiles that boosted GDP growth by around 1% per year during much of the past six decades…

Our main goal in presenting these results is to correct the common misconception that developed countries went through a “normal” period of high growth, as if we are all entitled to fast-growing prosperity. In reality, the developed world is entering a new phase in which the low fertility rates of past decades lead to slow growth (in many countries, no growth) in the young adult population; young adults are the dominant engine for GDP growth. Mature adults, many of whom are at or near their peak productivity, are poised to retire, creating an impressive surge in the rolls of senior citizens. These newly minted senior citizens, transitioning from near-peak productivity to retirement in a single step, will be drawing on the economy while no longer producing goods and services. The unequivocal good news of a steady rise in life expectancy means that these retirees will create a very substantial drag on GDP growth, as these seniors move from peak productivity to negligible productivity in just a few years.

The danger is not in the slower growth. Slow growth is not a bad thing. It’s still growth. The danger is in an expectations gap, in which we consider slower growth unacceptable. If we expect our policy elite to deliver implausible growth, in an environment in which a demographic tailwind has become a demographic headwind, they will deliver temporary outsized “growth” with debt-financed consumption (deficit spending). If we resist the necessary policy changes that can moderate these headwinds, we risk magnifying their impact.

As argued above, the high growth rates experienced in the decades leading-up to the global financial crisis were an anomaly and growth is likely to be far more sedate going forward as the population ages and dependency ratios worsen. And although Australia won’t be hit as hard as some other nations, it too will feel the pinch.

This piece is cross-posted from Naked Capitalism with permission.

One Response to "Aging Demographics to Crunch Global Growth"

  1. David Capek   July 16, 2013 at 6:38 pm

    Can we safely conclude the 12 countries will average zero GDP and broke social security nets in twenty years? As they said in the thirties, nobody had any money so it didn't seem unusual to be poor.