Seeking a demographic dividend for everyone

There are only three sources of economic growth: population growth, technology, and the use of natural resources. In this article, we focus on population growth as an engine for economic growth. The relentless growth of the world's population seems, at first glance, to be good news for the economy. However, shifts in the composition of the population also pose significant challenges. After all, it is the active working population that largely determines the creation of wealth. We discuss the most important evolutions, possible scenarios, and opportunities associated with these demographic developments.

 

One year ago, in November 2022, the United Nations celebrated the symbolic birth of the eighth billionth person on Earth. It took the world's population about ten years to grow from seven to eight billion. It seems almost certain that population growth will begin to slow from here. The UN estimates that we will need fifteen years to add the next billion and another 20 years to reach 10 billion people. As we extend our horizon further into the future, the uncertainty naturally increases, but currently, the UN expects a peak of 10.4 billion people around 2085.

 

What is certain is that all projections have recently been revised downwards. The main cause is the declining fertility rate (see below) which, contrary to earlier expectations, seems to continue unabated. The emancipation of women through education and increased participation in the labor market, declining child mortality, rising costs of raising children, and a lack of confidence in the future among part of the younger generation all contribute to this phenomenon.

 

Source: Econopolis, OurWorldInData

 

A declining fertility rate combined with an increasing life expectancy is causing a significant aging of the world's population. This is undoubtedly the most important demographic evolution for the coming decades. Particularly Europe and, eventually, Asia seems to be heading towards a reduction in the working population.

 

Source: Econopolis, OurWorldInData

 

When we keep other factors constant, this means bad news for the economic growth figures - after all:

Gross National Product / population = Productivity (~ technology) * working people / population

 

This evolution presents society with important issues and challenges. The number of people of retirement age (in the exercise below +65 years) in relation to the working population will roughly double in the next two decades. Collective arrangements such as social security, (statutory) pensions, and healthcare will inevitably come under pressure as a result.

 

Source: Econopolis, OurWorldInData

 

The graph above is, of course, somewhat speculative due to the very long-term perspective. If we zoom in on the more foreseeable future and some individual countries, then large differences emerge - in some cases dramatically. While India and certainly African countries will be able to enjoy a so-called 'demographic dividend' (a relatively young population) in the coming decades, European countries such as Germany and France, but also Japan and ultimately China, will face a serious increase in the dependency ratio.

Source: Econopolis, OurWorldInData

 

Where there are challenges, there are naturally also opportunities. Opinions on the consequences and impact on financial markets are still quite varied today. While some prepare us for a more general 'asset meltdown', we especially see opportunities for specific individual companies to respond to these evolutions.

 

Preparing for an ‘Asset Meltdown’?

Given the high concentration of wealth in the hands of older generations, some observers anticipate a so-called 'asset meltdown'. The reasoning is that, to cover their pension consumption, baby boomers would become net sellers of financial assets. Because the subsequent generations are smaller in number, this would consequently exert downward pressure on the financial markets... It is indisputably true that today, a large portion of wealth is still concentrated among generations born before 1965 - for illustration, see the following figures for the United States:

Source: Econopolis, Federal Reserve

 

However, today's retirees must span an (increasingly) longer period (~rising life expectancy) in which their healthcare expenses only increase. In this context, an income from assets seems clearly preferable over an (immediate) realization of that same wealth. Moreover, financial assets are often concentrated in larger estates that typically think across several generations. Without fearing a massive selling pressure, we are therefore looking more for individual companies that come up with solutions to the main demographic evolutions.

 

A longer, healthier, and happier life.

To respond to these demographic trends, we categorize companies into three themes that focus respectively on a longer, healthier, and happier life. Longer-living people imply, in our opinion, a number of necessary technological innovations. This is essential to ensure the affordability of social security, pensions, and healthcare expenses. Further automation of manual labor should increase the productivity of the (shrinking) workforce. Medical innovations, in turn, should be able to combine better and cheaper healthcare. The financial sector should also be able to present even better solutions to make pension capitals yield and facilitate the transfer of wealth between generations.

 

While we would not want to limit a happier life to (more) consumption, we do see a number of (new) trends. The rapidly rising middle class in emerging markets is increasingly mirroring its Western counterpart. Globally, we see younger generations preferring 'experiences' over the consumption of goods. For example, the prospects for the travel sector remain bright. The spending pattern of the capital-rich baby boom generation undergoes significant adjustments once people retire. Finally, we also see that a rising (world) population still goes hand in hand with further urbanization. Companies that help facilitate the further development and upgrade of urban infrastructure, therefore, have the wind in their sails.

 

Perhaps the greatest 'demographic challenge' lies in a quality bridging of the last years of life. Generally, today the last 8 to 10 years of life are experienced as little 'quality' (e.g., free from diseases). Although classical medicine certainly has a role to play, we only see the relative importance of prevention increasing. People will have to take more control themselves by focusing on a healthier lifestyle through a more balanced diet and more exercise.

 

In conclusion, we can say that the world faces several significant demographic challenges in the coming years and decades. At the same time, we see many opportunities arising for well-managed companies that can offer solutions for these challenges. At Econopolis, we want to focus even more on this in a forward-looking way.