It should not come as a controversial statement (at least within the context of this article) that the world is set to suffer from a slowing-population problem as well as an ageing population problem.
We are already seeing the growth rates slow drastically across key economies, which is mostly due to a combination of a falling birth rate (less people choosing to raise large families) and a slowing death rate (people living longer). The migration rate also plays an important role, although is variable depending on the country in question.
India is a stand-out over the next 15 years
Overall, India remains well placed in absolute terms, with their population expected to grow at approximately 1.0% for the 2016-2030 period. To put the importance of this in context, China appears set to see its population growth slow to just 0.2% as a consequence of their historical one-child policy (the change in policy is not expected to help for decades), and worse still, is set to fall nominally in 2026. Australia remains quite small and nimble on a global scale, and despite an overall population increase from 7.4 million in 1945 to close to approximately 25 million today, is expected to continue growing close to 0.9%pa over the coming 15 years.
India versus China is looking like a one-sided issue
The population trend between China and India is remarkable, although needs to be considered in the context of household spending if it is to impact economic growth.
In India, the population trend is one of the best globally, which works very well given the structure of the economy, whereby household spending accounts for 58.0% of GDP (more than Australia but less than the USA). It could also be argued that India are set for greater household effectiveness, especially given the low GDP per capita baseline (relative to mature economies) and an intense focus on education standards. On this basis, it seems to be a glaring opportunity for Australia to redirect its exports; however, this won’t be without challenges as India is far more self-reliant than China and does not have the same need for iron ore or coal.
China on the other hand, has a far worse population trend despite the scrapping of the one-child policy. However, it is also important to realise China are far less reliant on household spending to drive economic growth. In fact, Chinese household spending accounts for only 37.4% of GDP, meaning a falling population may have a smaller impact if trade continues to grow. There is also scope to grow GDP per capita by a significant margin, which could add to total GDP beyond the concerning population trend.
Deeper analysis of the working population
An added advantage for India is that they have a young population. This means more workers and less retirees, which by extension implies a greater ability to earn more income and hence increase household spending. There are many ways to explain this concept, but one of the most important from an investors perspective is to view the ‘prime’ working population, defined by 45-64 year olds. Some people are calling this the “peak spender theory”.
What can we learn from the above?
Based on this evidence, a falling population growth rate could have substantial implications for the future economy. A living example is Japan, where a falling population has created the “lost decade(s)” despite some of the strongest growth rates in GDP on a per capita basis. For many of the key economies, including the USA and China, this falling population growth rate could have material implications and be deep-rooted as a structural headwind to long-term growth.
Whether this causes an economic disaster is a much harder question. On face value, there is enough evidence to suggest that falling population growth rates are severe enough to substantially increase the risk of an economic demise. This logic follows the path that lower growth increases the risk of periodic recessions and hence creates potential for social unrest and debt-fuelled policies (we are already seeing this in the USA, Europe and Japan).
However, there is insufficient evidence to suggest the inevitability of an economic demise on the basis of population trends alone. On this note, it is important to reiterate the difference between a falling population and a falling growth rate in the population. The latter is far less severe, which would explain the difference between Japan (which has suffered a falling population), versus the USA (a slowing growth rate).
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