Have you noticed that service has gotten a bit slow (if non-existent) and finding people to hire more difficult? It’s a world problem. This week we have Capital Group’s economist Jared Franz discussing this key topic of population decline. Below is a summary. For the full article, you can find it here.
China recently joined the long list of countries that had more deaths than births in 2023, underscoring a declining population trend that could upend the global economy. Demographic changes have major implications.
The United Nations predicts the world will reach peak population around 2086, but I think that figure may be optimistic. One reason is because the pandemic-era baby bust in some countries may have worsened the decline, and the problem appears to be long-lasting. Even in certain African and Latin American countries, where birthrates are historically high, the number of newborns has dropped closer to the replacement rate of 2.1 children per woman. Given these trends, humanity’s population could peak around 2050.
Crossing a demographics point of no return
But what does a planet with fewer people mean for society? It’s a position the modern world hasn’t been in, so we would be crossing a demographics Rubicon.
Demographics influence what people buy and a company’s revenue potential. From an economist’s perspective, it helps determine monetary policy and, ultimately, the well-being of each successive generation.
Declining population is negative for growth
Economists care about demographics for a reason. Put simply, the long-run economic growth rate of a country depends heavily on population growth, with the other piece of the puzzle being productivity, which measures worker efficiency. That is, if you have population growing at 2% and productivity at about 1%, a country’s gross domestic product is about 3%.
Sustained growth flows through to eventually increase income per person — an important indicator of the overall health of an economy. Over past generations, income has been growing for much of the world, alongside quality of life.
Price distortions
It might seem ridiculous to write about deflation given the years-long battle central banks worldwide are waging against rapid price increases. However, Japan presents a compelling case study of why deflation, or falling prices, may be the result of demographic shifts.
The scenario is straightforward: Every day in Japan, there are fewer people and less demand for goods and services, which exerts a downward pressure on prices. When this happens, economic slumps or recessions are more likely, and typical central bank toolkits to combat downturns — such as lowering rates — aren’t as effective. The Bank of Japan implemented a negative interest rate policy in 2016 to spur economic growth, but that policy is largely viewed as a failure as GDP has generally been weak since the early 1990s.
Robots to the rescue?
There’s an unintentional collision of two forces happening right now: demographics and artificial intelligence (AI). These two disruptive megatrends will change the future of work across health care, manufacturing, commerce and more.
Some might look at current demographic trends and think the world will be negatively impacted. Others note fewer people could mean less stress on the environment. There is a strong relationship between population growth and carbon dioxide emissions: When economic activity increases, so do CO2 emissions.
In all these challenges there are opportunities. Is your portfolio well diversified across the world and across industries? We focus on building well-diversified portfolios. Reach out to schedule a free review.
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