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).
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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:
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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:
One area that is likely to be adversely affected from population ageing is house prices. Last week, Citi’s Global Head of Credit Strategy, Matt King, produced the below series of charts showing the relationship between dependency ratios and house prices in a range of countries. King explains these charts as follows (from Business Insider):
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“It’s what I like to call “the most depressing slide I’ve ever created.” In almost every country you look at, the peak in real estate prices has coincided – give or take literally a couple of years – with the peak in the inverse dependency ratio (the proportion of population of working age relative to old and young).
In the past, we all levered up, bought a big house, enjoyed capital gains tax-free, lived in the thing, and then, when the kids grew up and left home, we sold it to someone in our children’s generation. Unfortunately, that doesn’t work so well when there start to be more pensioners than workers.”
Of course, housing is just one area that is likely to be adversely impacted from population ageing. For more analysis of this issue, check out the following articles:
Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
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.
