The future demographic landscape in developed countries — with increasingly older and fewer workers, as well as aging consumers — will create significant macroeconomic and market challenges all over the world.
Over most of the last 400 years, the number of people in the global labour force has been rising — and rising at an increasing rate. Moreover, the labour force was increasingly the predominant part of the population. But this dynamic has waned recently, and in the next 10 to 20 years, we’ll witness the beginning of global labour force decline. Some countries have already begun this process.
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Barring longer working lives, higher labour participation rates or a reversal in the secular decline of the average workweek, we’ll have to make up for those changes with higher productivity if we want to maintain the global growth rates we’ve experienced in the post-World War II era.
More seniors, fewer young people
Neither markets nor policymakers have fully grasped the idea that demographics are changing — and fast. As a proportion of the whole population, we’re seeing more seniors and fewer younger people who are employed, so we’ll have to fund the social costs of the elderly with a proportionally smaller group. For example, by 2030, the number of Canadian workers per retiree will drop by nearly half, United Nations figures reveal. Pension funds, insurance companies and public sector social safety nets aren’t ready for this. Markets haven’t yet fully digested it either.
The effect will be global, although demography will have varying impacts on different regions and countries. In some countries, the labour force is already peaking as the population ages rapidly. Eurozone demographics are particularly challenging: Italy, Portugal, Germany and Austria — to name but a handful of European nations — have low fertility rates, low and slowing population growth rates as well as meagre and declining labour force growth rates.
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On a relative basis, Canada — along with the U.S., Britain and Australia — has a stronger demographic profile. What ties these countries together are modestly higher fertility rates and higher flows of immigration. The immigration paradigm for Canada and Australia is more focused on bringing in skilled workers. These workers are typically highly educated, have fewer dependents and often move directly into the workforce. This creates a more favourable macroeconomic environment because it raises the labour force growth rate and fosters fiscal revenue generation — meaning, Canada will likely fare better than many other developed countries as the global population ages.
What to do
With population aging and the labour force declining as a proportion of the overall population, institutional investors will have to think long and hard about how to position their portfolios to offset the likely slowdowns in economic growth.
Overall, there must be lower expectations of broad-based returns for both equities and bonds. Investors looking for growth should consider the challenges small- or mid-sized growth companies face, especially those leveraged to certain sectors in aging markets (e.g., baby supplies, children’s clothing) or those exclusively focused on domestic markets. Value equities — especially those of durable franchises that source revenues from outside their aging home markets — may be more likely to meet investors’ needs.
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The same goes for high-quality corporate bonds with longer maturities, such as 50 years. Investors should be cautious about high-yield bonds issued by companies in aging economies, due to slow growth and low inflation. Without economic growth and the inflation that comes with it, high-yield issuers, especially lower-quality ones, will have more difficulty terming out their debt over time.
The bottom line is, we’re moving away from a world where demographics have been a tailwind to growth into an environment where demographics will be a headwind. And ignoring the issue won’t make it go away.
Erik Weisman is chief economist and portfolio manager with MFS Investment Management.
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