THE world is about to experience something not seen since the Black Death in the 14th century—lots of countries with shrinking populations. Already, there are around 25 countries with falling headcounts; by the last quarter of this century, projections by the United Nations suggests there may be more than 100.
THE world is about to experience something not seen since the Black Death in the 14th century—lots of countries with shrinking populations. Already, there are around 25 countries with falling headcounts; by the last quarter of this century, projections by the United Nations suggests there may be more than 100.
Such a shift seems certain to have a big economic impact, but there is plenty of debate about what that impact might be.
Such a shift seems certain to have a big economic impact, but there is plenty of debate about what that impact might be.
A new report on the demographic outlook by Berenberg, a German bank, focuses on one important measure: the dependency ratio. This compares the number of children and the elderly with people of working age (those aged 15-64). The higher the dependency ratio, the greater the burden on the workforce. In the world’s biggest economies, America apart, the workforce is set to shrink significantly (see chart*).
In many developed countries, the dependency ratio rose after the second world war (thanks to the baby boom), fell in the late 1960s and 1970s as the boomers entered the workforce, and has recently started rising again. That history makes it possible to analyse how economies performed during periods of both falling and rising ratios. Berenberg based its analysis on ten rich countries: America, Australia, Britain, France, Germany, Italy, Japan, Spain, Sweden and Switzerland.
The show has been kept on the road by big reductions in interest rates, which have enabled most borrowers to keep servicing their debts. And demography suggests that the era of low interest rates is set to continue. Berenberg finds that, since 1960, real interest rates have tended to rise when the dependency ratio is decreasing and fall when the ratio is rising (as it is now forecast to do).
Sure enough, the authors find that, since 1960, the median increase in real house prices when the dependency ratio was decreasing (ie, when there were relatively more workers) was 2.7% a year. However, when the dependency ratio was increasing (ie, relatively fewer workers), real house prices fell by 0.2% a year.
The big question is whether economic growth and rising debt levels go hand-in-hand, or whether the former can continue without the latter. If it can’t, the future could be very challenging indeed. To generate growth in our ageing world may require a big improvement in productivity, or a sharp jump in labour-force participation among older workers. To date, the signs on productivity are not encouraging and elderly employment ratios have a lot further to go.
