Perspective on Risk - Sept. 16, 2022 (Demographics)
World Population Prospects 2022; Global Changes; China; US Life Expectancy Sucks; How Will Demographic Changes Affect Growth; A US Diversion on Demographics & Housing;
Sometimes, we get lost in the day-to-day and sometimes forget the big picture. Those who’ve known me a while know that I like to fixate on three things for the long term:
Demographics
Technology
Globalization
These three factors have had a positive growth, deflationary affect on developed world economies for the last few decades, but prospects for at least two of these three (demographics and globalization) are suspect going forward. Climate change may also be a separate factor. though I need to think that through more.
World Population Prospects 2022: Summary of Results
The UN has recently published World Population Prospects 2022. A few of their key findings are:
The latest projections by the United Nations suggest that the global population could grow to around 8.5 billion in 2030, 9.7 billion in 2050 and 10.4 billion in 2100.
In 2020, the global population growth rate fell under 1 per cent per year for the first time since 1950. The world’s population is projected to reach a peak of around 10.4 billion people during the 2080s and to remain at that level until 2100.
India is projected to surpass China as the world’s most populous country during 2023.
Countries of sub-Saharan Africa are expected to continue growing through 2100 and to contribute more than half of the global population increase anticipated through 2050.
The share of the global population aged 65 years or above is projected to rise from 10 per cent in 2022 to 16 per cent in 2050. By 2050, the number of persons aged 65 years or over worldwide is projected to be more than twice the number of children under age 5 and about the same as the number of children under age 12.
For high-income countries between 2000 and 2020, the contribution of international migration to population growth (net inflow of 80.5 million) exceeded the balance of births over deaths (66.2 million). Over the next few decades, migration will be the sole driver of population growth in high-income countries.
Global Changes
Respected economists Goodhart and Pradhan are calling attention to demographic change in a new book. These two had previously published a similar, but non-commercial, analysis in 2017’s Demographics will reverse three multi-decade global trends.1
I haven’t read it yet, but intend to. I have however read a number of reviews and will highlight some of what they claim.
It argues that the confluence of these two dynamic forces led—over the past three decades or so—to deflationary forces that explain falling inflation and nominal interest rates. These two phenomena also contributed to weak nominal wages, increased inequality in many countries, and social and political upheaval. Going forward, both forces will operate in reverse, leading to looming inflation pressure. The logic of the argument, in the body of the book, points to this plot playing out in the next three decades or so.2
Manoj Pradhan and Charles Goodhart argue in The Great Demographic Reversal that aging societies will slow growth; revive wages, inflation and rates; and test pension and care systems world over in the coming decades.3
They further argue
that the demographic reversal and the very expansionary monetary and fiscal policies put in place to combat COVID-19 will lead—sooner rather than later—to less saving and more investment. That will push the natural rate up.4
@policytensor notes:
the implications for inflation, rates and growth are not immediate. The direction of the impact on inflation is clearest — higher dependency ratios are inflationary, almost tautologically so.5
the secular trend is positive for inflation. But it may be overturned by developments in productivity, global slack, and other factors.6
Here is a projection of the world’s dependency ratio from the UN’s Population Division.
Goodhart and Pradhan highlight an issue I have been discussing for quite a few years, namely that there is tremendous population growth about to occur in India and sub-Saharan Africa. This graph is from their 2017 paper.
@Macroalf tweeted a good chart from The Lancet that perhaps makes the demographic changes more tangible.7
Goodhart and Pradhan argue that India and Africa are unlikely to replicate China’s success:
A major factor in keeping India and Africa from becoming economic powerhouses is the lack of an administrative infrastructure. Such infrastructure is critical to help deploy domestic or imported capital to take advantage of the growing supply of labour. The World Bank’s Ease of Doing Business index (Graph 20) shows how much more progress both India and EMEs in general have to make in creating better business conditions. India’s administration has recently embarked on a series of administrative improvements that are likely to help the economy accumulate capital faster. However, in our view, this could raise growth above its historical average of around 6% or so, but its economic size is still far too small for such a growth rate to have a global impact. Some African economies do score better, and a few even better than China. However, these economies do suffer from weaker human capital compared to India.
This is not just an issue for India and Africa - it affects developed economies directly. First, without sufficient in-country economic prospects, we are likely to see significantly increased migration pressures from these sources. Second, and perhaps more important economically, these countries will need capital to grow, and Western capital will need the higher return-on-investment opportunities that these will generate. Absent improvements that allow global capital flows to fund these investments, the “savings glut” in the West/China will reduce investment returns. This is the intersection of demographics, geopolitics and climate change.
Back in May, Adam Tooze highlighted African demographics in Chartbook 1218. In it, he discusses Youth Quake by Edward Paice
Despite optimism in recent years, the relative lack of economic growth in Africa is well-known. Less well-appreciated is the extraordinary historical novelty of it demographic development.
[B]y 2100 the African share of global population will likely be between 35 and 40 percent. And in 2100 the population of several African countries - Chad, Mali, Niger, Nigeria, and South Sudan - is likely still to be growing.
One of the questions that Paice poses is: What is going on with our understanding of the demographic transition?
In Africa what we are seeing is that that [standard demographic transition] model is not working as expected so we have to dig deeper into the data to understand better what is going on.
The sheer scale of Africa’s demographic acceleration makes it a vastly significant megatrend, which will relativize the dominance of Asia by the mid-century. But it is all the more significant because of the questions it begs about economic development and attendant on that about environmental sustainability.
If interested in further reading, I recommend What is to be done about the US death crisis? by Policy Tensor.
China
As we have discussed before, China is aging very rapidly. These charts are courtesy of Niall Fergusson
Chinese fertility is below that of the US, both due to increased wealth and the legacy one-child policy.
In fact, the percentage of China’s population over 65 will exceed that of the US in about a decade.
US Life Expectancy Sucks & Is Getting Worse
We trail most all developed countries. US life expectancy is now lower than in China, and three years less than in Cuba. (disgraceful).
The FT examined US trends in How US life expectancy fell off a cliff, concluding:
By my calculations, the opioid epidemic has thus far wiped off the best part of a year from US male life expectancy at birth
There are several other areas that, if addressed, could also narrow the gap between the US and the rest — gun deaths (both homicide and suicide) and elevated rates of road accidents account for an additional 9 and 6 lost months respectively, relative to peer countries.
How Will Demographic Changes Affect Growth
@policytensor took his analysis of Goodhart & Pradhan a step further writing on his Substack A Quantitative Estimate of the Effect of the Demographic Reversal on Growth.
I used a panel regression (with country and year fixed-effects) on the Jorda et al. dataset to estimate that a 1 percentage point increase in the dependency ratio reduces the growth rate of real output by 0.085%. If the US dependency ratio converged to that of Japan’s, I estimated that trend US growth would fall by 1.2% per annum.
Our estimate of the elasticity of real growth to our selected demographic signal suggests that each additional percentage point in the 20-69/70+ ratio predicts 0.6% higher real growth. Put another way, if the ratio of the working age population to the aged falls by 1 percentage point, we expect real growth to fall by 0.6% per annum.
For the “headquarter” advanced economies, we find very significant demographic headwinds. (The thickness of the curves corresponds to the difference between the low and high UN projections.) We expect real US trend growth to fall from nearly 2% per annum to under 1% per annum by the 2040s. Germany faces even worse demographic headwinds. We project that real German trend growth will fall from 1% per annum to 0% per annum by the 2040s. Finally, since the UN expects Japan to remain the “frontrunner” in aging, we project that Japanese trend growth will fall into negative territory by the 2040s. … We find similar projected trend declines in European countries. Surprisingly, we find that trend growth in Spain and Italy will go into negative territory by the 2040s.
Demographic headwinds thus emerge as a major challenge for the foreseeable future. Indeed, they threaten to upend political economies worldwide and combine with the climate crisis to yield tremendous instability.
A Diversion on US Demographics & Housing
Bill McBride, he of the Calculated Risk blog, is one of our favorite housing analysts. He has a nice post discussing how changing US demographics will affect housing.9
The current demographics are now very favorable for home buying - and will remain positive for most of the decade.
The next big housing shift will be when the Baby Boom generation starts to downsize and move to retirement communities. No cohort is monolithic - some people will age-in-place until they pass away, others will move in with family (or family will move in with their parents), and some will move to retirement communities.
The leading edge of the Baby Boom generation is currently 75 (born in 1946), and these people will be turning 80 in 2026. … The peak of the boomers will be turning 80 in 2035 or so, and the tail end turning 80 in 2044 (born in 1964). … My sense is there will be a pickup in Boomers selling their homes in the 2nd half of the 2020s and lasting until 2040 or so.
Goodhart & Pradhan, Demographics will reverse three multi-decade global trends, BIS Working Paper 626
@policytensor twitter thread
Opsid.
@policytensor twitter link to specific tweet
@policytensor twitter link to specific tweet
@Macroalf twitter link to specific tweet
McBride, Housing and Demographics: The Next Big Shift, CalculatedRisk