Rethinking long-term growth in an ageing world

Maturing populations threaten to undermine economic growth, public finances and financial markets

Few factors shape our economic future as profoundly as demographic trends. This edition of the Bulletin aims to shed light on the challenges and opportunities presented by changing population dynamics, the impacts on long-term growth and the implications for investment strategies. At present, impending demographic shifts pose unprecedented challenges for economies and societies around the world.

But the message is not all doom and gloom. While some regions will benefit from their youthful populations, elsewhere, difficult demographic trends can spur innovation and proactive policy-making to drive long-run economic progress.

For decades, economies have relied on ever-expanding populations to fuel growth and development. Positive birth rates signalled a consistently growing labour force which, in addition to advancing technology and productivity, underpinned continuous and stable growth over the long run.

But we have now entered a new demographic paradigm. Birth rates have declined in many countries, while advancements in healthcare have led to longer life expectancies. Dependency ratios, or the share of the elderly and non-working in relation to the working population, are growing. And as societies age, a range of economic dimensions are affected, from labour markets and productivity to public finances and social welfare systems. Understanding the impact of these trends is no longer a choice; it is a necessity for policy-makers, economists and investors alike.

For many of our contributors, shifting demographic patterns are cause for alarm. In an interview with Charles Goodhart, professor emeritus at the London School of Economics, he posits that growth is bound to fall across most major economies as increases in investment will not suffice to offset the the decline in the number of workers. In the same vein, Ed Parker, global head of research for sovereigns and supranationals at Fitch Ratings, warns that ageing populations will slow growth, exacerbate government debt burdens and negatively impact credit ratings. Correspondingly, Kim Catechis, investment strategist at Franklin Templeton Investment Institute, cautions that the traditional view of demographics as a catalyst for economic growth is no longer appropriate and growing pressure on public finances demands pension and social service reform. In Germany, skilled and unskilled labour shortages are undermining the country’s growth outlook and there is little political will to address this, writes Professor Gunther Schnabl of the University of Leipzig.

Others see reason for optimism. For Africa, a booming and youthful population could be a major catalyst for economic growth, writes African Development Bank President Akinwumi Adesina. With the right policy mix and sufficient investment, the continent could reap huge benefits from this ‘demographic dividend’. At the other end of the demographic curve, Jesper Koll, global ambassador and expert director of Monex Group Japan, reflects that a smaller supply of labour due to an ageing population will lead to better wages and conditions for workers, triggering higher economic participation rates.

Whether the outlook is positive or negative, mitigating the risks and harnessing the opportunities of demographic shifts will require astute economic policy-making. Katharine Neiss, chief European economist of PGIM, notes that by increasing female participation rates, Italy has an opportunity to offset the country’s diminishing workforce. Additionally, the most dismal of growth predictions in the context of population ageing can be mitigated, argues State Street Global Advisors Chief Economist Simona Mocuta, by deploying more capital and making better use of existing workers.

We also heard from institutional investors on the impact of demographic trends on their investment strategies. An interview with Torbjorn Hamnmarkhead of strategic asset allocation at Swedish pension fund AP3, explains how demographic trends interact with the energy transition in an ageing society. He notes how, in the future, social welfare funding and tax rates may impact their investments and investee companiesRidha Wirakusumah, chief executive officer of Indonesia Investment Authority, writes on the country’s sovereign wealth fund and its objective for long-term, sustainable investment towards digitalisation and developing infrastructure to meet the needs of Indonesia’s booming youth population.

Despite the difficulties posed by demographic trends, these shifts can also be seen as catalysts for innovation and progress rather than insurmountable obstacles. When the proportion of the working-age population declines, relying solely on labour-intensive growth models is becoming increasingly unsustainable. Instead, investments in research and development, technological advancements and automation can help offset the shrinking labour force and boost productivity levels. Whether policy-makers and governments are up to the task, fostering sustainable growth in a world of ageing populations will require innovative, inclusive and proactive economic policy-making.

Taylor Pearce is Senior Economist at OMFIF.

This article was originally published in the summer 2023 edition of The Bulletin.

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