Over the past three years, I have argued that the retirement of the large baby boomer generation, and population ageing more generally, will create stiff headwinds for global economic growth (for example, see here and here).
Yesterday, ANZ Bank released a detailed report arguing along similar lines that the retirement of the baby boomer generation would create a demographic challenge to the global economy, effectively acting to lower the world’s growth potential and making it harder to grow living standards.
Below are some key extracts from the ANZ report.
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The post-World War Two spike in fertility rates, which lasted approximately two decades across the US, Europe, Australia and New Zealand, temporarily reversed the downward trend in fertility rates. The economic consequences have been profound. Initially, this bulge in the population provided a tremendous boost to economic growth, as growth in the working age population outpaced that of dependants. However, the oldest members of this generation have now reached retirement age, which is resulting in significant challenges and changes for advanced economies. The shift of baby boomers into retirement is likely to act as a drag on growth and result in an increase in entitlement and health care costs.
The combination of falling fertility rates, increased life expectancy and the post-World War Two baby boomers drifting into retirement is resulting in a structural shift in the global population. The number of people aged 65 or over increased by around 400 million between 1950 and 2010 to 520 million, but it will only take another 20 years for there to be around 1 billion people aged 65 or over and by 2050 this will have increased to just shy of 1.5 billion people.
In general, advanced economies will be the first to be impacted by the ageing phenomenon. Even though Japan, the world’s oldest economy at present, will see its population continue to fall, the number of people aged 65+ will jump by around 30% to 40 million and will account for just over 35% of its population by 2050. Europe also has particularly unfavourable demographics. By 2050 a little more than a quarter of the European population will be aged over 65 compared to around 15% in 2010. Strikingly, the ageing process won’t be confined to the wealthier northern and western European countries, but will also adversely impact their poorer eastern European counterparts, as a result of mass emigration to the West following the disintegration of the Soviet Union.
Emerging economies are still typically some way behind, but will also begin to age more rapidly. As developing countries begin to age, they will have less time, and won’t be as wealthy as advanced economies to adjust to the ageing process. While it took Germany around 55 years for the share of its population aged 65 or over to increase to 20% from 10%, it is expected to take South Korea, China and Taiwan just 19, 20 and 21 years respectively. In contrast, due to lower life expectancy and high fertility rates, Africa is expected to age much more slowly…
The majority of advanced economies will experience shrinking working age populations. Japan and Germany will record the sharpest falls, with the working age population in these countries declining by around 31% (25 million) and 27% (15 million) respectively by 2050. Across Europe the working age population will fall by 19% or about 95 million people after having risen by around 80 million workers in the previous four decades. The United States and Australia will remain something of an exception amongst advanced economies, with strong immigration flows and relatively high fertility rates ensuring solid growth.
Both advanced and emerging economies have benefited from a ‘demographic dividend’, in which the working age population has grown faster than the total population, providing a boost to GDP growth. Through the 1960s, 70s and 80s, many economies benefited from the demographic transition spurred on by reduced child mortality, resulting in a steep rise in the number of working age persons per dependant. As growth in the working age population slows, this trend will begin to reverse, with fewer people of working age for every dependant. Indeed, this ratio peaked in Japan and the US in 1991 and 2006 respectively. It will peak in China, Thailand and Malaysia in 2014, 2015 and 2021 meaning that these countries only have a limited time to take advantage of their demographic advantage. India remains an important exception, with the ratio of working age people per dependant, not expected to peak until 2040…
These demographic shifts will have profound impacts on the potential GDP growth of both advanced and emerging nations. By taking into account population growth, changes in the working age population and participation rates, it’s possible to estimate the impact of demographic change on GDP growth. The combination of populations ageing along with the slowing – and in some instances reversal – of working age population growth will prove a headwind to growth.
Demographic factors contributed positively to growth across all economies, with the exception of Russia between 1991 and 2010…
Of the advanced economies, Spain, Australia and the US received the biggest contribution to growth from demographic factors, while labour made more modest contributions to growth in Japan, the UK and Italy. Many people often attribute the poor performance of the Japanese economy to a financial and nonfinancial asset bubble and the ensuing period of deflation that ensued, completely relegating the impact of demographic forces. However, demographic factors explain around 0.7ppts annually of the growth differential between Japan and the US over this time period.
Over the next two decades, however, demographics overall will contribute less to global GDP growth and in some cases, will begin to subtract from growth in some countries. Not surprisingly, European economies will face significant demographic challenges, with many of them facing shrinking working age populations and in some instances a contraction in total population. Germany will see its potential growth reduced by around 0.5 ppts annually over 2011-2030. Germany is hardly alone in Europe, however, with labour likely to be a drag on growth in Russia, Italy, Spain and France. In conjunction with the sovereign debt issues that euro area economies are currently dealing with, Europe’s longer-term demographic profile suggests that GDP growth in Europe will be structurally slower over 2011-2030. In contrast, labour will continue to contribute positively to growth in Australia, New Zealand, Canada and the US, reflecting these countries’ higher fertility rates and stronger levels of immigration.
Labour will also begin to be a drag on growth in some emerging and newly industrialised Asian countries. In China and South Korea, demographic factors will begin to directly reduce potential growth from 2019 and 2021 respectively. For the most part, however, demographics will continue to lift potential growth in most emerging countries over 2011-2030, although their positive impact on growth will be decidedly less than the preceding two decades.
While the ageing of the world’s population provides a sobering picture of potential GDP growth prospects, particularly for advanced economies, demographic trends are not immutable and governments have the capacity to play an active role in shaping their direction…
While the raw quantity of labour is important, it’s just as critical to account for changes in the quality of labour available in the economy. In this regard, improvements in education play a significant role in lifting the level of human capital, which is critical to the performance of modern knowledge-based economies…
Governments can mitigate the impact of ageing populations, especially in advanced economies, through policies that boost labour force participation, thereby expanding the pool of available labour in the economy…
As argued previously, 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.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
