Global impact of shifting demographics on growth

This article is part of
Emerging Markets - March 2015

Investors generally make decisions based on long-term views but it can be interesting to take a step back and look at even longer term trends.

These can form a backdrop against which to make investment decisions.

One key long-term trend is that of demographic change. At its most basic, this is the stark fact that unless global fertility rates fall significantly, the world’s population is set to grow markedly in the next few decades.

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In addition, the make up of the global population will also change dramatically, as developed countries learn to care for a larger proportion of older citizens compared to the relatively younger populations of less developed nations.

These factors will have radical implications for the global balance of economic power, as well as the immediate challenges of feeding, clothing and housing this expanding population.

Put simply, overall economic growth within any given country can largely be accounted for by two factors: the size of its working population and its productivity. A country’s GDP can grow through stable productivity combined with population growth, a stable population that is more productive, or a blend of the two. The story of the Industrial Revolution was largely a tale of the latter, although improving agricultural efficiency caused immense demographic shifts as rural workers relocated to cities and provided labour for industry.

While productivity in the developed world is significantly higher than productivity in emerging markets, its rate of growth has slowed naturally. Thus a slowdown in population growth, or even a shrinking population, becomes a considerable headwind to economic growth. Demographic profiles of most developed markets show rapidly ageing populations, a trend that is then followed by falls in populations. This will put pressure on GDP growth. Bear in mind though that if the productivity of a developed country can continue to improve faster than the pace of decline of its population, the result for individuals could still be rising living standards. Then the main issue will be making sure the current working population saves enough to fund its old age.

Elsewhere, the younger populations of many emerging economies should be able to deliver significant growth, in spite of lower levels of productivity in these regions. That said, the story is not quite so simple.

China’s policies, for example, have led to the proportion of older citizens increasing compared to the population at large. Its government may be able to stave off the point at which this becomes a real crisis through the policy of relocating people from country to city, but if it has not organised itself adequately to fund the cost of caring for its elderly inhabitants, then a crisis is inevitable. Long term, this growing risk could be enormously destabilising, both to China and the surrounding regions, as the implicit trade off between democratic freedom and economic growth in China unravels.