Economic impact of ageing populations is obvious, but ignored

Economic growth

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Fertility Oct13Too many policymakers, companies and investors are continuing to ignore the dramatic changes taking place in the age profile of the global population.  Yet common sense tells us these must have a major impact on the economy.  The impact comes from 2 equally important developments:

  • One is the rise in the number of people in the New Old 55 age group, as I discussed last week
  • The other is the relative decline in the number of young people born since the end of the BabyBoom in 1970, as I discussed 2 weeks ago
  • The chart above summarises the position since 1950 – there has been a 50% increase in global life expectancy to 70 years, whilst fertility rates have halved to just 2.5 babies/woman

The change in fertility rates in the Top 10 economies, responsible for nearly 2/3rds of global GDP is even more dramatic.  Their fertility rates are now below the replacement level of 2.1 babies/woman.  This means their populations are actually in long-term decline, without immigration.  In some countries such as Japan, populations are already shrinking:

  • Its population fell by 268k last year, as there were 1.269m deaths compared to 1.001m births
  • By comparison, Japan had 2.7m babies born in 1949, the peak of its post-War BabyBoom

Ageing populations have an enormous impact on economic growth.  This is because younger adults aged 25 – 54 years do most of the ‘heavy lifting’ in terms of consumer spending.  And consumer spending is around 2/3rds of the economy in most countries.

I wrote about this recently for the Financial Times, and UK data parallels that for most other major economies:

  • The combination of low fertility rates and increased life expectancy means most households are now headed by someone aged over-50
  • These older households spend much less than the younger ones, an average of $24k ($36k) versus £30k
  • Equally important is that spending declines across all major categories after the age of 50
  • Housing and transport costs decline immediately, whereas recreation and food & drink decline after the age of 65

But contrary to the stereotype, these are NOT people using walking sticks with one hand, whilst they swallow pills with the other.

The average Westerner who reaches 65 has another 20 years of life expectancy ahead of them.  And it is only in the last 18 months of life that healthcare costs suddenly begin to jump for most people.

CONCLUSION
Companies and investors thus have a choice ahead of them.  They can either bury their hands in the sand, and ignore the obvious.  Or they can revisit their business models, and refocus on the opportunity to supply affordable and necessary products to the New Old population.

Demographics are destiny, after all, and they also drive demand.  Smart managers will draw the obvious conclusions about future growth opportunities, and how to access them.

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