An Age-Old Question

Estimated reading time: 2 minutes

World population growth will be the slowest in at least 65 years in 2016. The number of retired people will grow at the fastest rate in history while most residents of high-income countries will be aged over 40 for the first time.

Lower fertility rates and longer life expectancy are leading to shrinking and ageing populations in many parts of the world – not just developed countries.

Demographics are a key determinant of potential economic growth, but the changes in global population over the next few years are unprecedented. Japan’s population started to shrink in the mid-1990s and Germany’s began contracting around 2000, but now the working-age population of the world’s most populous country, China, is shrinking for the first time.

The challenges posed by ageing populations are particularly pressing in developed markets. Their working-age populations grew by 0.1 per cent a year over the past decade but will fall 0.3 per cent each year until 2025. Without a change in policy, economic growth will be hampered by the labour force reducing each year until 2050. After decades of providing a dividend to global expansion, demographics will now pull down growth rates significantly.

Smaller populations mean less demand and less potential output. A higher ratio of retirees to working-age people means greater expenditure on healthcare and less tax income.

Globally, although working-age populations are still growing, we expect global potential growth to be 0.6 percentage points lower each year over the next decade compared with the past 10 years.

The turning point is sharp. Babies born soon after the Second World War are starting to retire and developed markets have seen fertility rates fall below the 2.1 replacement level of the past 40 years.

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