Demographically speaking, a golden age is coming to a close

Population Ageing: Economic Decline

BY MARCUS ROBERTS

I’ve just read a fascinating article over at Bloomberg by Clive Crook about the macro-economic effects that the world’s ageing population will have in the next 40-50 years. His argument is that most commentators and politicians and economists have failed to properly appreciate and think through the “unprecedented” (his words) fall in the ratio of working people to retirees. As he notes:

“A remarkable boom in the world's working-age population is ending, and a new boom in the population of retired people has begun. People are living longer; more importantly, when it comes to reshaping the global age structure, they're having fewer children. Today, there are roughly four people of working age for every person aged 60 or over. By 2050, it's estimated there'll be just two.”

Leaving to one side the new financial strains that will come upon most societies as they struggle to pay pensions and healthcare as an obvious implication, Crook argues that the world’s current patterns of saving and investment will change in the years to come. This is because generally countries with an older population save less than countries with a younger, working population because people tend to save while they are working and then spend their savings once they’ve retired. As certain countries age more quickly than others, this will have an impact on debtor vs creditor nations:

“For years China and Germany have had persistent current-account surpluses (reflecting an excess of saving over investment), while the U.S. has been persistently in deficit. But China and Germany are now aging faster than the U.S. Their so-called support ratios -- the number of workers per consumer -- are falling faster. So their external surpluses are likely to decline.
Japan, at the leading edge of the aging curve, shows the way. By the same token, the U.S. deficit is likely to narrow. In the future, Africa, Latin America and South Asia will have relatively high support ratios -- which implies high saving, which implies external surpluses.”

Crook also argues, drawing on the work of Goodhart and Erfurth, that real interest rates, which have been declining over the last couple of decades, will start to rise again.


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