Explore the effect of a slowing, aging population on a country's GDP.
Aging Population
I have for some time been thinking about the changing demographics in the world. The population pyramids that we learnt about in school are turning on their heads. There are not as many births in the developed world and people are living longer and healthier lives.
The first thing to say is that the Baby Boomers were not the best savers! They bought houses, and they contributed to their company pension plans, but outside of that they didn’t save a lot in discretionary portfolios. The average total wealth for retirement of the Baby Boomers in America is estimated to be around $400,000. If we assume that on average they will live for another 12 years, that works out at around $45,000 per year. That sounds like a lot, but it is in fact below the median household income in America.
Spending patterns do change as people age. First of all, the contributions to retirement savings fall away, as people transition into using their pensions rather than saving. Expenditure on clothing, transportation, food and entertainment all fall, but cost of healthcare rises. Discretionary spend on new cars, or overseas holidays becomes less and where one might eat in fancy restaurants while you’re earning a salary, perhaps somewhere cheaper becomes the choice of restaurant.
When we get into the economics, we need to remember the equation that GDP Growth = Population Growth + Productivity + Debt Growth.
As populations shrink, the impact on real GDP growth is significant. There are less people to enter the workforce and as a result, the unemployment rate remains fairly low. Japan’s population is about 10 years older than the American population, and they have had an unemployment rate below 3.5% for the last decade.
Governments around the world are indebted, and they continue to borrow at unprecedented levels, and could possibly be seen to be buying GDP Growth as their populations shrink. The robots and machine learning will probably contribute to Productivity, but in a way that we can’t yet understand from social perspective. As we head into a world of Artificial Intelligence and robotics, this may not be a big problem from a productivity point of view, but I don’t think governments have worked out how to tax robots yet, and they have made a lot of promises to cohort of people who are entering retirement now.
On the positive side, if the aging population spends less, inflation should not be a long term problem, and interest rates should gently decline back to a longer term trend of 2-3%. It is hard to see what the next twenty or thirty years hold in the way of economic growth and productivity. I think our best case study at the moment is Japan, and they have survived the last twenty years. While demographic changes pose challenges, they also present opportunities for adaptation, innovation, and policy adjustments to sustain economic growth. As always, it is about adapting to the changing environment and trying to anticipate where the opportunities will lie.
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.
Aging Population
I have for some time been thinking about the changing demographics in the world. The population pyramids that we learnt about in school are turning on their heads. There are not as many births in the developed world and people are living longer and healthier lives.
The first thing to say is that the Baby Boomers were not the best savers! They bought houses, and they contributed to their company pension plans, but outside of that they didn’t save a lot in discretionary portfolios. The average total wealth for retirement of the Baby Boomers in America is estimated to be around $400,000. If we assume that on average they will live for another 12 years, that works out at around $45,000 per year. That sounds like a lot, but it is in fact below the median household income in America.
Spending patterns do change as people age. First of all, the contributions to retirement savings fall away, as people transition into using their pensions rather than saving. Expenditure on clothing, transportation, food and entertainment all fall, but cost of healthcare rises. Discretionary spend on new cars, or overseas holidays becomes less and where one might eat in fancy restaurants while you’re earning a salary, perhaps somewhere cheaper becomes the choice of restaurant.
When we get into the economics, we need to remember the equation that GDP Growth = Population Growth + Productivity + Debt Growth.
As populations shrink, the impact on real GDP growth is significant. There are less people to enter the workforce and as a result, the unemployment rate remains fairly low. Japan’s population is about 10 years older than the American population, and they have had an unemployment rate below 3.5% for the last decade.
Governments around the world are indebted, and they continue to borrow at unprecedented levels, and could possibly be seen to be buying GDP Growth as their populations shrink. The robots and machine learning will probably contribute to Productivity, but in a way that we can’t yet understand from social perspective. As we head into a world of Artificial Intelligence and robotics, this may not be a big problem from a productivity point of view, but I don’t think governments have worked out how to tax robots yet, and they have made a lot of promises to cohort of people who are entering retirement now.
On the positive side, if the aging population spends less, inflation should not be a long term problem, and interest rates should gently decline back to a longer term trend of 2-3%. It is hard to see what the next twenty or thirty years hold in the way of economic growth and productivity. I think our best case study at the moment is Japan, and they have survived the last twenty years. While demographic changes pose challenges, they also present opportunities for adaptation, innovation, and policy adjustments to sustain economic growth. As always, it is about adapting to the changing environment and trying to anticipate where the opportunities will lie.
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.