Siddharth Saravat, Vice President, Economist, Payden & Rygel, writes that media stories are replete with demographic doomsaying. A shortage of workers. A lack of immigration. In some regions, there are too many people. In others, too few children. Aging and the burden of public sector costs. It goes on and on.
“Demographics” also serves as a catch-all excuse for many macro views. Some say interest rates will revert to pre-Covid levels in the developed world due to weak demand (“It’s demographics!”), while others worry about runaway inflation due to faster wage growth stemming from workforce shortages (“It’s demographics!”).
People production paramount
Suppose you, dear reader, live long enough (say, the next 63 years). In that case, you may experience something unseen in human history for at least the last 60,000 years: the peak and prolonged decline in the size of the human population.
That’s right, not since humans migrated out of Africa millennia ago has the number of humans roaming the earth gone in reverse for any extended period. But by 2086, the human population could peak at around 10.4 billion and begin to decline.
Why the decline? It won’t be because of climate change or a pandemic. Of all the supply chain problems consumers have faced, one product’s production process is difficult to change: human beings.
Despite scientific advances, producing human offspring still requires a 40-week gestation period—and then nearly two decades of care and comfort to create a fully functioning adult of use to society (or longer for some).
As such, for every two people choosing to produce offspring, only so many new children can appear in the decades ahead. To “replace” the current population, the fertility rate—the average number of children born to every woman—would need to be at least 2.1 (to account for more boys being born than girls). Once we know how many people we have now and how many new ones we can produce each year, we can guess how many people will exist in, say, 20 years.
Children are our future
South Korea serves as the perfect example of declining birth rates. The South Korean fertility rate has dropped 86 per cent since 1960, from almost six births per woman to 0.81 in 2021! According to the United Nations’ World Population Prospects report, South Korea’s population could fall by around 20 million in the next 50 years. That is despite the United Nations’ slightly higher fertility rate projections!
China, often the poster child for discussions of demographic doom, faces a similar predicament. China’s fertility rate is already down to 1.16 births per woman, so China’s population could decline by around 654 million in the decades ahead from the current tally of 1.4 billion.
Interestingly, India may fare best (at least if the goal is to have more people!). Based on current figures, the long-term population of India could reach 1.7 billion, around 600 million more than China’s at that point. Imagine the geopolitical consequences.
However, India may fall well short of 1.7 billion people. India’s fertility rate is already at 2.0. And India’s overall fertility rate is 1.6 in urban areas, well below the replacement rate.
Africa is the exception, but as per capita incomes rise, fertility rates usually fall, as seen elsewhere. Also, Africa will likely need more time to grow to offset shrinking populations elsewhere.
Overall, the total world fertility rate was 2.27 in 2021, according to the World Bank. When will the world rate dip below the 2.1 threshold? Possibly as soon as the next two decades.
Fertility rates could pick up, whether through government incentives, cultural shifts, or technological advances—nothing is inevitable.
Moreover, many of our readers may rejoice over the population news (and some may even argue it could not happen soon enough!). Fewer people equals less demand for natural resources. Better for the environment, the story goes.
Unfortunately, this story, though popular, is wildly short-sighted.
First, global economies have already become less resource-intensive over the last few decades, even as the population reached new global heights.
Second, at first blush, fewer people mean slower economic growth if productivity growth rates remain similar to historical norms. After all, economic growth is simply the number of people working and the output they produce over time—productivity. In the US, for example, labour productivity averaged ~2 per cent in the 50 years pre-Covid. With a 1 per cent workforce population growth, overall economic growth trended at ~3 per cent annually. However, even with average productivity growth, overall GDP will struggle to expand if population growth goes negative.
A critical problem with a lack of economic growth is ballooning government debt. The only way to overcome a debt problem is to be ever more productive to offset population decline. Otherwise, the demographic burden will become a hefty fiscal burden, especially if public health and pension costs also grow as aging occurs.
Could productivity growth pick up to offset demographic decline? Advances in machine learning provide some hope that technological advances could push productivity upward, but the math is difficult to overcome. That said, there is hope: since the 1950s, only about 15 per cent (or 0.3 percentage points) of US economic growth is due to population growth. Rising educational attainment, more research & development, and a rising share of the population working contributed more to growth.
People generate problems but also solutions
For us, the biggest problem of population decline is that fewer people will generate fewer ideas. Some research indicates that ideas are becoming more difficult to find, and most growth comes from new firms forming (based on new ideas). Fortunately, at least in the US, new firm formation appears to be trending up.7 But we wonder whether this will persist with aging populations and shrinking labour forces?
College enrolment may suffer in the coming decades. Fewer children mean fewer students, fewer graduates mean fewer professors, and fewer professors probably mean fewer colleges. As for the institutions themselves, the stronger names and brands will survive, but fewer students will be left for the lower-tier institutions. We already see evidence of this in South Korea, where total student enrolment has declined for 18 straight years.
It’s the demographics, stupid!
Even a subject as seemingly simple as demographics, with some hard-to-argue-with math at its core, leaves ample room for uncertainty about the future, especially as we stretch into the next few decades, not just the next few years.
Nothing is predestined, but we hope this quick tour of the demographic landscape elucidates the problems and possibilities we may face.
This material has been authorised by Payden & Rygel Global Limited, a company authorized and regulated by the Financial Conduct. Authority of the United Kingdom, and by Payden Global SIM S.p.A., an investment firm authorized and regulated by Italy’s CONSOB.