Megatrends: the silver linings from shifting demographics

In 2022, the world population reached 8 billion with 80% growth in the last 40 years alone. This rising population is partly due to people living longer, with the number of people aged 65 and over increasing by 623 million in the past two decades alone. By 2040, this older population is set to reach 1.3 billion. Yet the global fertility rate has halved since the 1950s.

While ageing populations have been thought of as a developed market phenomenon, by 2050 two-thirds of the world’s elderly will live in emerging markets[3]. One of the most significant demographic timebombs is in China, where the one-child policy has left an ageing population dependent on fewer and fewer working people. This is labelled the 4-2-1 problem, where a single child cares for two parents and four grandparents.

In many ways, ageing populations are to be welcomed: they reflect improvement in nutrition, medical advances, sanitation and education. An ageing population is a proxy for human progress. However, it also brings significant challenges for governments and economies, particularly as falling birth rates reduce the labour force of tomorrow. This puts a strain on revenues and spending. It also brings about shifts in consumption patterns, with profound implications for investors.

The chart below shows that the old-age dependency ratio (the number of over 65s relative to the number of adults of working age) is set to increase across the world's major economies over the next five years to 2027, and then sharply in the years to 2050. It is Japan that faces the biggest challenge. In 2050, there will be 80 pensioners in Japan for every 100 adults of working age.

This brings a number of important questions:

Urbanisation

Urbanisation has been an important phenomenon, with implications for the way people work, live and consume. Until 2009, more people lived in rural than in urban areas. This has flipped in the decade since, with 55% of the world’s population now living in towns and cities[4]. China, India and Nigeria are particular hotspots for urbanisation.

Internal and international migration

Migration is also important. It has always been a feature of human progress, with people moving to find new opportunities. More recently, climate change and war have also pushed more people away from their homes. The number of forcibly displaced people was over 70 million in 2018, including close to 26 million refugees. This is a persistent problem for governments – few have found politically acceptable ways to deal with mass immigration.

Lower fertility rates

Global fertility rates are declining rapidly, which presents a major problem for economic growth. Put simply. economic output in a given economy is a function of labour and productivity. Setting aside productivity, the implications of falling births are quite straightforward: fewer people, means fewer workers, which means lower economic output.

Strain on healthcare

Although the average man in the UK can now expect to live to almost 80, his average healthy life expectancy is only 63 years [5]– he will spend 17 years with some form of health condition, such as high blood pressure, type II diabetes or heart disease[6]. This puts a considerable strain on government finances, only partially compensated by lower spending on areas such as education. As more people spend a longer time in ‘not good’ health, this will create undesirable economic outcomes: people may not be able to work, for example, or may need to fund expensive and ongoing medical care themselves.

Ageing populations mean fewer taxpayers

At the same time as costs are growing, a larger retired population leads to fewer people in work paying taxes. This holds back GDP growth and productivity. The ageing of the workforce may also depress investment[7]. Countries with ageing populations face the prospect of shrinking economies.

Governments are visibly struggling with the implications of this difficult balance. Taxes may need to rise on a shrinking working population to pay for the needs of an ageing population. The alternative is for governments to run significant deficits to support public spending. However, both options are politically uncomfortable.

Urbanisation requires new infrastructure

Governments need to ensure that there is the requisite infrastructure to support the incoming population, including adequate housing, infrastructure and education.

China, for example, has experienced unprecedented rates of urbanisation. Between 1978 and 2018, its urban population increased from 170 million to 837 million[8]. Given China’s GDP growth, its accelerated approach has been largely considered a success, though there have been challenges.

The balance of global economic power

Demographics can also change the balance of global economic power. Countries with ageing populations are likely to become less wealthy over time, while other countries will rise up. By the end of this century, the United Nations projects that Africa, which had less than one-tenth of the world’s population in 1950, will be home to 3.9 billion people, or 40% of humanity. This has long-term geopolitical and environmental consequences.[10].

Despite the risks presented by shifting demographics, there are opportunities for long-term investors.

Sources:

[1] World population reaches 8bn as it grows older, Financial Times, 16 November 2022

[2] Births in England and Wales: 2021, Office for National Statistics, 9 August 2022

[3] Ageing and health, World Health Organization, 1 October 2022

[4] Shifting Demographics, United nations, un.org [accessed December 2022]

[5]Health state life expectancy all ages UK, Office for National Statistics, 4 March 2022

[6]What is happening to life expectancy in England?, The Kings Fund, 10 August 2022

[7] The macroeconomic and fiscal impact of population ageing, European Central Bank, No.296/ June 2022

[8] T. Honga N. Yua Z. Maob S. Zhang, Government-driven urbanisation and its impact on regional economic growth in China, Cities, Volume 117, October 2021

[9] Q. Ye, S. Qijiao, Z. Xiaofan, Q. Shiyong and T. Lindsay, China’s New Urbanisation Opportunity: A Vision for the 14th Five-Year Plan, Coalition for Urban Transitions, May 2020

[10] Megalopolis: how coastal west Africa will shape the coming century, The Guardian, 27 October 2022

[11] Health spending set to outpace GDP growth to 2030, OECD, oecd.org [accessed December 2022]

[12] Silver Lining: The Investment Implications of an Aging World, PGIM, 16 March 2016

[13] Silver Lining: The Investment Implications of an Aging World, PGIM, 16 March 2016