Fathom Consulting
August 12, 2022

News in Charts: Demographics – looking into the future

by Fathom Consulting.

The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

Major demographic changes can have profound impacts on geopolitics, the global economy, national economies, and financial markets. Below we highlight some of the key demographic shifts expected over coming decades and discuss some of the likely macroeconomic impacts.

The global population will continue to soar and peak at around 10.5 billion later this century according to the UN’s latest forecast. This suggests that we will see dramatic changes in the composition of the global population. China is expected to lose its crown as the world’s most populous country to India, with the Middle Kingdom’s population forecast to almost halve by 2100. The population of Europe is also expected to fall from almost 750 million to under 600 million by 2100,[1] whereas the population of the US is expected to continue to rise from less than 340 million to almost 400 million. The rapid growth in the global population will be primarily driven by Africa, whose population is forecast to almost triple by 2100.

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Particularly important from a macroeconomic perspective, will be the growth in the size of working-age populations,[2] which determine the size of the labour force. Changes in the latter, and in its productivity, are key determinants of future trend growth. A fast-rising working-age population can boost growth, with the converse true for a declining one. Moreover, large increases in the supply of workers can help keep wage and inflationary pressures contained, with the opposite potentially occurring for a shrinking workforce. A falling or slow-growing working-age population is also likely to result in a sharp rise in the dependency ratio – the proportion of the population aged 0-14 and 65+ divided by the size of the working-age population – straining public finances.

The previous rapid decline in its birth rate, means that China’s working-age population has already begun to fall, and this process will accelerate sharply through the 2030s. The working-age population of Europe will continue to decline, while that of the US will be largely unchanged. The ultimate impact on trend growth will depend on whether countries can find offsetting increases in productivity growth. The growth in the global working-age population will largely come from Africa, where it is estimated to increase from around 800 million to 2.5 billion by 2100.

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China’s entrance into the global economic system following the policy of ‘Reform and Opening Up’ resulted in a huge increase in the effective global labour supply, helping to push down global inflation. Given the existence of some remaining rural labour and significant levels of underemployment, Fathom does not see China as an immediate source of global inflation. Nevertheless, over time, much could hinge on its ability to substitute capital for labour. The extent to which global production can be moved to the increasingly labour-rich, low-cost African countries is also likely to be important for future global inflation.

A rapidly ageing population in China and across advanced economies is highlighted by the expected increase in old-age dependency ratios. The latter are forecast to increase quite markedly in Europe and the US, but to a lesser extent than in China. China is ageing at much lower levels of income than has historically been the case.

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All in all, the world is expected to experience profound demographic changes. Declining working-age populations will weigh on growth and public finances, with the overall impact depending on the extent of any offsetting boosts from productivity. The impact on global inflation may depend on the ability to substitute capital for labour and/or shift production to labour-rich African countries.

[1] In the UN definitions Europe includes Russia and Ukraine.

[2] The working-age population is typically considered to consist of those aged between 15 and 64 years old.

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