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Michael Baxter

The great demographic shock

Written by: Michael Baxter on May 21st 2015

Category: Thought for the day

We all know that the west has a big demographic shock coming, but earlier this week I saw data that I found quite alarming.  

The data come courtesy of the United Nations Population Prospects, 2012 edition and Deutsche Bank, via Pete Comley and his book Inflation Matters  and a talk he gave for the ERC earlier this week.

There are two factors, which determine population: the fertility rate and the death rate.  They are both falling. That means, of course, that the average age is rising. It also means that, to an extent, even as the fertility rate falls, the overall population does not.

Assuming that medicine is never going to create immortality or even extend our lives much beyond 100, there is a lower limit to how low the death rate can fall. That means that after a while population will peak, and then start declining.

This is already happening, or at least is on the cusp of happening in Japan, Germany and Russia, as well as other countries in both western and eastern Europe 

The fertility rate is currently below the 2.1 replacement rate across much of the world. It is just over this level in Mexico and Bangladesh – 2.20, Indonesia – 2.35, South Africa – 2.40 and India – 2.50.  The point is that in these countries the fertility rate has fallen very sharply indeed over the last half a century. It has halved in India, for example. In each of the countries to which I refer, it is surely only a matter of few years before it falls below the replacement rate.

The big exception to this is Africa. For example, the fertility rate stands at 6.01 in Nigeria, and has only fallen slightly in the last half a century.

Fertility Rate 2010 - 2015

All this has implications for population. Deutsche Bank projects that the global population will fall from 8.7 billion in 2050, to 8.02 billion by the end of the century.

It reckons that the population will peak in China between 2030 and 2040, Brazil during the following decade, and it will peak in India in the second half of the century. 

See this chart:  

When will population peak?


 Demographics experts do not expect the population to peak in either the UK or the US this century.

You may know about Thomas Malthus. Back in 1798, he penned an essay in which he suggested that population growth is geometric and growth in output is arithmetic, and thus humanity attempts to end poverty will always fail. Malthusian theory even influenced Charles Darwin, when he wrote the Origin of Species.

However, if the projections on population were even partially right, it would appear that Malthus was wrong. If only we can only get through this century, it appears that the risk of the global economy descending into a Malthusian nightmare will have been banished completely.

You might ask why. That is, why are fertility rates falling? I think the answer lies in education, especially of women, and indeed emancipation of women, and the provision of state funded pensions. This means we no longer need children to provide for us in our old age.

What are the implications for investors? You might say that 2010 or even 2050 is a way off yet, do we really need to factor this into our investment decisions?

The answer to that is yes. Recall that the Japanese economy hit the buffers long before its population peaked. The make-up of a population matters just as much as its overall size. Before population peaks, the ratio of retired to working population will rise too.

As a very rough rule of thumb, the further out the day when population will peak, the greater the economic potential over the next few decades.

This all rather suggests the economic prospects for the UK and the US are good, and so they are, providing that the two countries avoid seeing the continuing rise in the population being associated with a growing social divide.

It also suggests that Africa is where the best long-term prospects lie. Personally, I think that the combination of the internet, of solar power, and advances in energy storage give Africa – and indeed all emerging markets where the demographics are not too onerous – a fantastic opportunity to close the technology gap with the developed world.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Tags: Demographics, Pete Comley, fertility rate, demographics and investment

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