Summer 2023

Growth is bound to fall

Taylor Pearce, OMFIF senior economist, spoke with Charles Goodhart, professor emeritus of banking and finance at the London School of Economics, about his predictions for long-term demographic change and the impact of ageing populations on labour and economic growth.

Taylor Pearce: What are some key demographic trends that you believe will have a significant impact on economic growth in the coming decades?

Charles Goodhart: We will see a sharp and persistent decline in fertility rates in all economies worldwide, with the exception of Africa. Combined with a continuing increase in life expectancy and a decline in growth rate of working age population, we will see a huge rise in the population of the ageing almost everywhere. In major economies like China, Russia and Germany, the working age population is now about to fall. In other major economies, it would be falling if not for the continuing net immigration into those countries.

In addition, the dependency ratio – the ratio of those who need support because they do not earn income relative to workers – is going to worsen quite rapidly from now on. The population as a whole, for most countries, will go on rising for the next 25 years because the number of old is offsetting the number of young. By 2045-50, though, the global population will begin to decline.

TP: How do changing demographics, such as ageing populations, impact long-term economic growth and productivity? How are demographics influencing consumer behaviour and consumption patterns?

CG: Growth is bound to fall as a function of the increase in the number of workers interacting with an increase in productivity of those workers, which will decline immediately and will directly lower aggregate growth rates. The decline in a stable supply of workers will put upward pressure on wage rates. This will be reinforced if tax rates on workers increase in order to maintain regular and continuing benefits to the ageing.

Under these circumstances, where ageing rates are rising faster than in previous decades, employers will increase investment, because labour is becoming more expensive. Investment ratios will rise and productivity per worker will rise to offset declining growth rates. But, in my view, this will not be sufficient to counter the decline in number of workers. Overall, given the declining aggregate growth, rising productivity per work, the shift within countries to more corporate investment and the increase in government expenditures and taxation, the result will be that consumption growth will slow.

‘The population as a whole, for most countries, will go on rising for the next 25 years because the number of old is offsetting the number of young. By 2045-50, though, the global population will begin to decline.’

TP: Are there specific industries or sectors that are more susceptible to demographic changes and what impact could this have on global growth?

CG: There is a rapidly increasing portion of those who are old or very old, like myself. Industries catering to the old – such as care homes and cruise liners – are going to do relatively well, while industries catering to the young, such as toys, will do badly. There will also be a switch within industries. A few years ago, for the first time, there were more nappies for the ageing produced in Japan than produced for babies. This trend will continue.

TP: What are the regional trends you foresee, and how will these interact to impact growth globally?

CG: The critical issue is what will happen in Africa. This is one part of world where fertility rates are still quite high and where the working age population is growing rapidly. There is a question whether the shortage of workers in advanced economies will be offset by immigration out of Africa, but social and political problems will make this difficult. Alternatively, there is the possibility to turn Africa into a ‘new China’– where capital and managerial expertise move to Africa to produce goods. This will require sufficiently stable and successful governments to enable extra production.

TP: How will the forecasted demographic changes over the coming decades impact inflation, interest rates and inequality? What are the implications for policy-makers as they seek to foster sustainable long-term growth?

CG: Inflation will be higher. Labour will regain bargaining power and both nominal and real interest rates will be higher than they have been in the last two to three decades. Inequality will fall, as returns to labour will be higher than they will be for capital. The last three decades have been great for those with access to capital. Managerial, human or real – the returns have been magnificent, while the returns for labour, especially unskilled labour, have been considerably less. This is likely to reverse itself over the next two to three decades. Inequality will be less of a concern in two decades than it is now.

‘Immigration is going to have an important effect in supporting and bolstering aggregate economic growth in countries into which immigrants are coming, like the UK and US in particular.’

TP: What role does technological innovation and automation play in mitigating or exacerbating the potential negative effects of demographic changes on economic growth?

CG: This is outside my field of expertise, and it is hard to predict or understand the implications of changing technology. It is possible that changing technology will reduce the bargaining power of certain groups within the economy. But the current technological wave through artificial intelligence and the ability of programmes like ChatGPT to construct plausible and sensible responses to various questions suggests to me it is more likely that the adverse impact will be primarily on semi-skilled workers in areas such as accountancy or journalism. That means impact on inequality is likely to be very uncertain.

One of the features of the demographic development is that there is going to be an increasing need for care of the old. This requires empathy, something which women are much better at that than men. The differences in relative pay and status where men have done better than women for most of history are likely to be reduced, if not entirely reversed. It is a great question: as our technology improves and there is less need for sheer physical strength, how is society going to handle the cohorts of young men with nothing much to sell other than muscle power? There is a good outlook for women, and much less of a good outlook for men, particularly unskilled men.

TP: How could immigration affect the composition of countries experiencing demographic decline, what role do you see this playing in long-term economic growth?

CG: Immigration is going to have an important effect in supporting and bolstering aggregate economic growth in countries into which immigrants are coming, like the UK and US in particular. Otherwise, the worsening of the dependency ratio would be really quite severe, and the ability to continue various structures of life in our economy would become much more difficult. But immigration has social and political problems that come with it.

On balance, it will be favourable to countries that continue to have inward immigration of those of working age – and especially those of working age with desirable skills – which are not to be found in their home population.

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