Serious Money: Charlie Fell Thomas Malthus is notorious for his observation that population growth would exceed the increase in food supply should built-in checks such as disease and war fail to contain the number of human beings.
The economist's Essay on Population was penned in 1798 and largely ignored. But four decades ago his work gained popular appeal. Paul Ehrlich's bestseller The Population Bomb, published in 1968, predicted that 65 million Americans would starve in the 1980s. His forecasts proved wide of the mark and today the world faces an altogether different challenge - the ageing of the developed world.
The world is getting older and the United Nations projects that by 2050 the number of elderly will exceed the number of young people for the first time in history. The Centre for Strategic and International Studies observes that throughout human history the elderly have rarely accounted for more than 3 per cent of the population in any country. But within 40 years roughly one third of the developed world's population will be aged 60 and over.
Unprecedented change in the world population's age profile is driven by three factors: people are living longer; they are having fewer children; and they are retiring earlier. The aged dependency ratio - the number of persons aged 60 and over relative to those aged 15-59 - is set to soar from 0.32 today to 0.63 in 2050.
Life expectancy at birth has jumped from 45 years since the second World War to 65 years today. This is the largest increase in all of human history. The figure for the developed world has risen from 65 to 75-80 today. Furthermore, life expectancy at older ages has improved dramatically. A typical person in the developed world reaching 65 can expect to live another 18-19 years, an increase of six years since 1950. Concomitantly, the average age of retirement has dropped throughout the developed world. The number of workers leaving the workforce is set to rise dramatically as the baby-boomers of the 1950s retire.
Indeed, retirees already account for one-fifth of the population in many countries, including Italy, Germany and Japan, while others will reach this benchmark in a matter of years - France and the UK in 2016, the US in 2021 and Canada in 2023.
Unfortunately, the number of young people entering the workforce won't be nearly as large. Fertility rates have plummeted over the past four decades. In 1960 the average number of lifetime births per woman was above the so-called 2.1 rate required to maintain a stable population in every developed country. Today, it is 1.6, and every country is at or below the replacement rate. Fertility rates have declined as female labour participation rates have increased, as has the age at which women give birth to their first child. More and more women have no children at the end of their childbearing years - one in five women in Italy and the UK and one in four women in Germany.
The working-age population has already peaked in Italy and Japan, and within a decade it will be declining in most developed countries. Among the few exceptions will be Ireland, Australia and the US. Within two decades, the total population in several developed nations will be falling. Indeed, Europe faces the greatest period of depopulation since the 14th-century's Black Death.
Immigration is unlikely to provide any meaningful solution, particularly in Europe. Ivan Wattenberg notes that Europe's number of net immigrants would need to rise from fewer than 400,000 today to almost two million per year if the current population is to be maintained. The number would need to jump to more than three million per year to maintain the working population and to more than 27 million per year to maintain the current dependency. Clearly, this is unlikely to happen.
Potential economic growth rates will decline as population ageing unfolds. A country's growth potential is determined by the growth of the labour force and the capital stock as well as productivity. Productivity could decline along with the labour force as the skills of an ageing working population became less relevant in a rapidly changing knowledge economy. Greater capital input could act as an offset but tax hikes and additional government spending required to finance retiree benefits will limit growth in the capital stock. Thus, potential growth in the developed world should slow to just 1½ per cent.
The decline in potential growth will undoubtedly have a negative impact on the outlook for corporate earnings, which could come under further pressure as labour commands an increasing share of GDP. The drop in the pool of labour means that jobs in the developed world will become increasingly difficult to fill. Indeed, the All India Management Association estimates that the gap of skilled workers could reach 39 million by 2020. Wage inflation looks set to increase in the future. Share prices are unlikely to react well, although the impact on total returns should be short-lived as increased dividend payments by companies mitigate the impact of lower growth.
The impact of population ageing on stock returns should not be material, although the same cannot be said of house prices. Popular locations such as Italy and Spain are set to become the oldest countries in the world with a median age of 54 years, while east European countries such as Bulgaria will endure significant declines in overall population. The implications for demand are obvious. The long-term outlook for continental European property is poor.
Charlie Fell is an independent consultant and lectures in finance and investment at UCD and the Institute of Bankers in Ireland
charliefell@sequoia1.ie
