Population and economic growth impact markets

Western economies have a significant demographic challenge as those of a working age support more and more people in retirement. Technology will help, but pensions contributions will rise.

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In 1804 there were around one billion people in the world. This doubled to two billion by 1930. Then growth speeded up and by 1974 the global population stood at four billion and next year should see eight billion people on the planet.

The Industrial and agricultural revolutions enabled the world to sustain so many more human lives. Pioneering breakthroughs in technology allowed rises in living standards to co-exist with meeting the needs of so many more people.

Chart 1: Total population and population growth rate projections

A typical pattern for a developing nation was to adopt more of the best technologies available to start a rise in living standards. Countries often with outside help would start to industrialise, and to mechanise agriculture to reduce the farm workforce. As this happened people often then opted for smaller families. They saw how this will boost their family prosperity by limiting the numbers of young to feed, clothe and educate. It frees them to work for better pay for longer as adults without the need to take time off to look after so many young children.

Children as an investment

In low-income countries, having more children was in the past often seen as expanding family work capacity given the use of young labour, and was thought necessary to combat higher death rates and the wish to have children to look after you in old age. Today child labour is condemned and controlled.

The advanced countries have seen fertility rates fall below the level needed to replace their populations. Each woman needs to have an overall average of two children to maintain numbers. In the US, the number is 1.78 children, in Germany 1.59 – and in Italy just 1.33. It is true these countries add to their populations through net migration, though in the case of the large EU western countries, migration does not offset all the fall from the low rate of childbirth. In China, the one-child policy has not been fully enforced and has now been relaxed, but there too women do not have enough children on average to replace the current population. China also experiences outward migration.

The world’s population overall is expected to carry on growing, but at a diminishing rate.

The centre of growth is most of Africa where fertility rates remain high and populations are relatively young. This is leading some to worry about the dependency rate elsewhere, the growing number of elderly people who need support and income from the working generation relative to the number of taxpaying workers. In Japan, this ratio has almost reached just two workers for every pensioner. In the EU it is around three workers and in China it is five.

If you add in the numbers of children who are also dependent, the figures balance up better between the different countries. The ratio of elderly and children to working age people is around 0.7 in the very different demographics of the US, EU and India. China has a much lower ratio at 0.55, thanks to low fertility rates and fewer elderly. Japan still has a relatively high ratio at 0.87, reflecting the large number of elderly people, despite the low numbers of children.

Chart 2: Dependency ratios projections

Markets are sometimes impressed by growth in an economy. It is more difficult for a country with a falling population to grow fast than it is for a country with an expanding population. It is often necessary to look at per-head growth rates in GDP to provide a fairer comparison.

The top twelve countries in GDP per head in 2017... were all small states offering generous tax incentives or extracting substantial quantities of oil and gas.

On this basis, Japan’s slow growth rate improves and India’s slows. There is still a large spread of figures for income or output per head. The top twelve countries in GDP per head in 2017 adjusted for purchasing power of their currencies were all small states offering generous tax incentives or extracting substantial quantities of oil and gas. The US, in 13th place, was well ahead of the EU and Japan, with 50% more income per head, and around six times the Chinese level.

Chart 3: GDP and GDP per capita since 1990

The likelihood of population growth dropping back from 1% to 0.5% over the first half of this century is a modest headwind for total global growth. Japan has shown how an ageing population and a rising dependency ratio makes it more difficult to grow fast and to innovate sufficiently. Europe is now developing more of these Japanese characteristics.

The US has a rising population by inviting in around a million every year to bring their energy and skills to a large and competitive market. It is likely the young populations of Africa will reduce their birth rates as their countries get richer, as others have worldwide. The advanced countries will have to adjust to more elderly people living longer. Policy responses will include raising retirement ages, requiring bigger contributions from people into insurance schemes or through taxation when they are in work to sustain elderly welfare, as well as encouraging more technology to help control care and health costs.

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Population and economic growth impact markets

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