Decoding demographic divergence

Life expectancy and growth

• Life expectancy is increasing and birth rates are declining around the globe. In many developed markets (DM) and in China, the balance of the two means their populations are getting older and the number of people of working age (ages 15-64) is shrinking – and set to shrink further over the next 20 years. This poses an economic challenge. All else equal, a shrinking workforce means an economy cannot grow as fast.
• Does that mean lower growth is inevitable? That’s a topic of much debate – as is aging’s impact on inflation and government debt. We see broad trends across countries with aging populations, but also expect individual outcomes to vary widely across countries and sectors, depending on the speed and size of the demographic change and how the country responds. That divergence creates potential investment opportunities and risks, in our view.
• The working-age population is a key determinant of, but not the same as, the employed labor force. Aging’s impact on growth depends on whether the affected country finds ways to offset the fall in the working-age population - for example, by attracting workers from other countries, or seeking to increase the share of women and other underrepresented groups in the labor force.

Various combinations of these have boosted the workforce, and thus economic growth, in G7 economies over the last 20 years. Extrapolating recent trends, the number of migrants, women and over 60s in the workforce over the next 20 years is unlikely to fully offset the fall in the workforce due to aging. That implies lower economic growth on average across the G7. Some countries may aim to boost the productivity of a smaller workforce, for example by investing in automation and artificial intelligence (AI), another mega force we track.

Is aging inflationary?

Retirees stop producing economic output but don’t typically spend less, historical data show. In aging economies, firms tend to rein in investment, but we expect only a mild pullback given ongoing investment in automation, AI and the low-carbon transition. With governments likely to spend more on healthcare, we think supply at the broad economy level will likely fall, on average, across DMs – but demand will not. The resulting inflationary pressure is one reason why we think central banks may need to keep interest rates above pre-pandemic levels. • Higher rates mean higher debt servicing costs for governments. Slower growth will drag on tax revenues, while pension and healthcare spending is set to rise across the G7. Stabilizing government debt relative to the size of the economy would require spending cuts or tax rises. Rising debt could make it more difficult for central banks to raise policy rates to combat inflation shocks in future – a further reason why we expect inflation to typically be higher in future than it was before the pandemic.

Our bottom line

Demographic changes – and their effects – will vary across countries. We think that dispersion of outcomes will create plentiful investment opportunities. We believe the key for investors is to be selective and assess what markets have priced in. Research finds they can be slow to price in the impact of even predictable demographic shifts. That looks to be the case now in the U.S. and Europe – and is why we like the healthcare sector in both regions.

In many emerging markets, the working-age population is still growing, giving them an economic advantage. We see opportunities in those that can best capitalize on it – for example, by improving workforce participation and investing in infrastructure – and outperform what markets have already priced. We think higher returns could be on offer in countries with greater demand for investment – like India, Indonesia, Mexico and Saudi Arabia.