21 March 2019

The Impact of Slower Global Economic Growth

Over the past 100 years, the world’s population has risen four times over, rising from 1.9 billion in 1919 to 7.6 billion today.  However, the rate of population growth has slowed in recent decades, particularly in the world’s leading economies.  In fact, most population growth today is concentrated in just a handful of the world’s poorest regions.  

This trend poses two major challenges that will confront the world in the years ahead. 

  • First, the pool of labor and of consumers is in decline (or soon will be) in many of the world’s leading economies. 
  • Second, in those regions where population growth is continuing at a high rate, jobs and resources are generally quite scarce.  

For now, we will focus on the first of these two issues, namely, the impact of lower rates of population growth in the world’s most important economic centers. 

In recent decades, birth rates have been trending downwards in most of the world’s most powerful economies.  For example, birth rates in much of East Asia and Europe have been well below the replacement rate for a long time now, a development that is evident in the rapid aging of the populations in those regions.  In recent years, birth rates have also fallen in other major economies, including in New World economies such as the United States and Canada, as well as in many emerging markets.  The US example is noteworthy, as that country’s long-standing demographic advantage over other developed economies is being jeopardized by a sharp decline in birth rates in that country over the past decade.   

When one analyzes the current rate of natural population increase (a country’s birth rate minus its death rate), it is evident that population growth in most major economies would be very small without a significant increase in immigration rates.  For example, the rate of natural population increase in the world’s two largest economies, the United States and China, is very low and is unlikely to rise much in the coming years.  Even worse, the rate of natural population increase in Japan and much of Europe is already negative, with four of Europe’s six largest economies now having declining populations without immigration.  

For some countries, these demographic changes are causing major shocks, as well as fears about their future well-being. A good example of this is Japan. Japan’s population is already in decline thanks to a very low birth rate and almost no immigration.  In fact, Japan’s population declined by 450,000 last year, with less babies being born in Japan last year than in 1899.  As a result, Japan’s overall population is forecast to shrink from 127 million today to around 97 million by the year 2050. Worse, its working-age population is forecast to shrink by a staggering 30% by the year 2050, an unprecedented decline for such an important economy.  A similar situation is underway in many areas of Europe, with countries such as Germany, Italy and Spain having some of the lowest birth rates in the world. Worse, some Central and East European countries have already seen their populations decline by as much as 25% over the past three decades, with further declines in population forecast for the coming decades.

One symptom of these population trends is a worsening shortage of labor in many areas of the world.  Major economies such as the United States, Japan and Germany are all suffering from labor shortages, with a lack of workers holding down growth in many sectors of these countries’ economies.  In fact, the unemployment rate in each of the world’s five largest economies (the United States, China, Japan, Germany and the United Kingdom) is now below 4%, an unprecedented level of low unemployment for the world’s leading economies.  In three of these countries, birth rates have been ultra-low, while immigration levels are very low in two of them.  Furthermore, resistance to immigration growing in each of these five large economies. As immigration is a sensitive topic these days, automation and artificial intelligence may prove to be a solution to these labor shortages.  In fact, major investments are being made in automation and artificial intelligence at this moment, with labor shortages proving to be an impetus for this growing focus on these technologies.   

While labor shortages are a worsening problem for many of the world’s largest economies, excess labor is a major threat to the stability of many of the world’s poorest countries.  In many areas of Sub-Saharan Africa, the Middle East and South Asia, working-age populations have soared in recent decades and will continue to rise at a rapid pace over the next few decades.  A perfect example of this is India, where the country’s working-age population will increase by a staggering 275 million people between now and the year 2050.  Fortunately for India, job creation levels are relatively high, thanks to an economy that has been growing at an average rate of 7% per year in recent years. Outside of India, most of the countries that are experiencing a rapid expansion of their working-age populations have much lower levels of economic growth and job creation.  As a result, emigration pressures are likely to soar in these high-population-growth countries, especially as many of them lack adequate basic resources such as water and arable land, let alone jobs. Unfortunately, immigrants from these region are finding themselves unwelcome in many of the countries that need them most.

The world economy is adjusting to these new demographic realities.  For decades, economic growth rates have been trending downwards in all developed economies and in many emerging markets, and much of this downturn has to do with the decline in population growth in these countries.  As we look ahead, it is clear that slowing population growth, including declining working-age populations in many key economies, will result in even lower rates of long-term economic growth in the future.  That is unless we can find new ways to boost productivity levels, for our demographic outlook suggests that only through productivity gains will economic growth levels rise significantly in the coming years and decades. As such, major economies such as the United States and China are already focusing much investment on automation, artificial intelligence and other technologies that have the potential to boost long-term productivity levels and to offset the impact of the world’s changing demographic profile.  At the same time, immigration will remain a major issue around the world, fueled by excess labor in many emerging markets and worsening labor shortages in many of the world’s leading economies.  Once again, demography will prove to be a leading driver of economic, political and social change for the world, and it remains to be seen if the world is adequately prepared for the impact of this change.