Macroeconomic Growth Drivers Through A Demographic Lens| MENAFN.COM

Saturday, 10 December 2022 08:14 GMT

Macroeconomic Growth Drivers Through A Demographic Lens


(MENAFN- ValueWalk) 'Demographics is the single most important factor that nobody pays attention to, and when they do pay attention, they miss the point.' - Peter Drucker, 1999

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When the world's population surpassed 7 billion a few years back, it triggered a media blitz of apocalyptic predictions of overpopulation and resource shortages. But those who study demographics knew that the story was much more complicated. As while the population is definitely growing, the population is also growing older. Between 1970 and 2015, the portion of the population that is over 65 has more than tripled and life expectancy has increased significantly. This is where the world's real demographic story begins (see CHART 1 and CHART 2).

Starting with the premise that longevity has risen and the world's population is aging, the world's demographic story is important to investors both on a micro and macro level. On a micro level, it can be used to assess supply and demand to determine what businesses will be operating in growing markets. For example, an aging population should see more growth in demand for pharma than surfboards. On a macro level, demographic data can provide a unique understanding of a nation's economic future which can have implications for markets, industries and companies. We have opted to explore the macro picture and have again gone outside the usual gaggle of market analysts. We have pulled from the work of Peter Zeihan–The Accidental Superpower, Kenneth Gronbach–Upside and various writings by former Credit Suisse demographer Alman Roy.

From their work, we have identified 3 basic demographic factors as a framework to assess a country's long-term economic prognosis. We then provide some insights into the demographic state of the world and its implications.

1. The Need For Productive Labor

From a demographic perspective, a large population of working age adults (generally ages 16-64) is required to fuel economic growth. A labor force not only provides the engine that allows businesses to produce their products, but also earns wages that are funneled back through the economy to create demand. CHART 3 provides a demographic look at GDP Growth for several countries. In all cases, as the growth of the working age population has slowed so has GDP Growth, forcing countries to rely on higher work force participation and productivity to push their economies forward.

It is worth noting, however, that increased work force participation and productivity are tied together by technology and to some extent they can be inversely correlated. As technological advances drive automation, the per worker output increases. This rise in productivity could potentially lead to less workforce participation (i.e. unemployment) as machines replace workers. Historically, the result has been a process of creative destruction in which unneeded jobs were replaced by newer jobs sometimes in entirely new industries. Whether the alternative intelligence being developed today will maintain the same paradigm in this regard has not yet been determined. What is clear is that machines will not spend money so that consumer demand in an economy without workers could suffer. The effect of automation will need to be monitored going forward.

2. The Ability To Support The Elderly

An aging population implies a higher percentage of retirees who are no longer economic producers. These people are essentially dependent on their savings, pensions and social programs for their living expenses. The Old-age dependency ratio measures the ratio of a population's elderly to working aged. To a large extent, it measures the amount of output by current workers that will need to be spent on supporting the elderly. Much of retirees' income relies on funding, either directly or indirectly, from current workers, so a high dependency ratio can jeopardize that funding. The chart below shows that the dependency ratio has risen over the last 30 years for several developed nations. Japan's ratio, in particular, has already reached an alarmingly high rate. As the population continues to age, countries with high dependency ratio will struggle to grow their economies (see CHART 4). This brings us to the final factor.

3. Children

While children are usually financially dependent, they eventually grow into adults and enter the workforce. This is necessary because when current workers retire, an economy needs workers to replace them. CHART 5 and CHART 6 (on the next page) explain this concept. They are demographic 'pyramids' that breakdown a population by age and gender. We chose to display the charts of India and Japan to contrast the difference between a healthy and unhealthy demography. Examining the charts, India's picture is of a healthy demography; it looks like a pyramid (see CHART 5). Its population has more people in their working years than in their dependent years and it has a healthy group of young people who will eventually replace current workers when they retire. Japan's chart (CHART 6), on the other hand, shows that the country has more elderly than children. As Japan's population ages, they will likely face a financial crisis as the current slew of workers retire and there is no one to take their place.

While a nation can change its demographic future, it is complicated. Birth rates, mortality rates and net migration all impact a nation's demographic profile; however, statistically meaningful changes take many decades. This makes forecasting dependency ratios decades into the future more reliable than many other forecasts.

Using the Japanese example, it is unlikely that higher birth rates could significantly alter Japan's demographic outlook as there is a limited population in child rearing years and it will be decades before newborns could meaningfully impact the workforce. Additionally, Japanese culture has historically been closed with low levels of immigration. There is no reason to believe that this will change. Therefore, it is likely that they will have an increasingly high dependency ratio into the future.

Using Data To Understand The World

  • America is entering a period of workforce reduction as the largest generation of workers to date, the Baby Boomers, are rapidly approaching retirement years. This will strain defined benefit programs, potentially decrease stock market investment and change consumption patterns. The trend should reverse in about 15 years as there is a large population of young people (Millennials) who will mature and take on the role as the nation's producers (see CHART 7).
  • The remainder of the Developed World faces a more severe aging trend than the United States (see CHART 8 on previous page) and does not have a large population of Millennials to reverse the trend. Additionally, the developed nations that are more reliant than the US on defined benefit plans to fund their retirees' lifestyles will see their problems exacerbated.
  • While China's economic growth has been the envy of the world, China's demographic picture (see CHART 9) is not pretty. They will face a major labor shortage and the country's dependency ratio projects to reach an alarming level within a few decades. Their predicament (and their growth) was at least partially caused by the one child


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