Predictions of a Rogue Demographer
Comment of the Day

September 10 2013

Commentary by Eoin Treacy

Predictions of a Rogue Demographer

Thanks to a subscriber for another in this educative series of reports focusing on the long-term implication of evolving demographics. The full report is posted in the Subscriber's Area but here is a section
First, aging societies will have to adjust soon to the fact that it is not possible for economies to sustain a retirement age in the early sixties. With people routinely living well into their eighties, it will soon be common for people to extend their working life into their mid-seventies. This is not an unreasonable expectation since today's old people remain remarkably fit compared to half an century ago (as this report was being written, 64-year old Diana Nyad successfully swam from Cuba to Key West, Florida). Societies that cannot make the socio-political adjustment to this new reality will struggle in the 21 st century and will unduly burden the shrinking base of young people entering the workforce.

Second, a corollary of the previous point is that aging does not imply a boom in retirement homes and an ever expanding medical sector. Yes, there will be more people in their sixties and seventies, but they will largely be fit and working. While there will be some increase in the medical support needed to keep this cohort going, it should not be blindly extrapolated from the past. Meanwhile, as anyone with children will know, falling birth rates will reduce demand for medical care from a high maintenance segment of the population.

This implies a change in the mix of medical care rather than a spiralling increase in per capita medical support6. Thus, the main impact of aging will be the extension of active, working adulthood rather than a situation where large portions of the population are living is a prolonged geriatric twilight. In turn, this will impact consumption patterns, urban real estate and even the education system. For instance, university systems will have to be reoriented to deal with middle-aged workers who need to update their skills over a 50-year career or perhaps want to completely change their profession. In contrast, the intake of younger cohorts will ease off due to the shrinking pipeline coming out of secondary schools. This implies a big change in the way education systems are set up.

Third, the global demographic shift is not a developed country issue since the shift has been faster for many emerging markets. Russia already has a shrinking workforce and many Latin American countries, contrary to popular belief, have TFRs that are at or below the replacement rate. Note that the older cohorts in emerging markets tend to be low-skill manual workers and this will make it more difficult for them prolong their work-life compared to better educated older workers in developed markets. The rapid shrinking of China's workforce from 2020, which is now unavoidable, will have a major impact on the dynamics of the world economy (even allowing for some older workers working longer). As argued in an earlier report in this series, China will transform itself from being the “factory to the world” to becoming the “investor to the world” (see “Global Imbalances in the Post-Crisis World”, The Wide Angle series, 30th November 2012). This will create opportunities for younger emerging markets like Indonesia, Philippines and, most importantly, India to enter market segments being vacated by China. In turn, they will be followed by even younger countries like Nigeria. Nonetheless, it should be emphasized that demographics alone is not sufficient to generate growth and cannot substitute for sensible policy leadership.

Fourth, some developed countries may do surprisingly well. The one developed country that stands out in our model is the United States. Even though our population growth projections are more moderate than those of the UN, the US can be expected to continue to enjoy an expanding working-age population till the 2050s (i.e. longer than many emerging economies). Germany's low birth rate implies a declining population but we feel that it will be much more successful in absorbing immigrants than anticipated by the UN. Thus, its demographic trajectory may not be quite as dire as generally believed.

Eoin Treacy's view We are living through a sweet spot in the terms of the global population and the numbers of people hitting their peak productive years. This is likely to be a bullish factor for the global economy for decades but as with all cycles will eventually end.

If productivity is the multiple of labour, technology, energy and capital, then the labour coefficient is likely to be a powerful driver in the next decades. Continued advancements in technological innovation particularly in the industrial, healthcare and energy sectors are likely to play a more important role as the global labour force eventually peaks. In the meantime, demographics are likely to constitute an important tailwind for the consumer and housing sectors for quite some time.

As a measure of the technology sector, the Nasdaq-100 is notable. The Index hit a new 12-year highs yesterday and while somewhat overbought in the short-term a clear downward dynamic would be required to check potential for additional upside.

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