IMF: Aging Populations, Stronger Risks of Deflation

January 25, 2015

 

As the general population of the world ages and grows at a slower rate in the future, governments will have to face up to the challenge of decreasing aggregate demand and the scourge of deflation, according to a recent paper by IMF economists Jong Won Yoon, Jinill Kim and Jungjin Lee.  

 

Declining Fertility & Mortality to Slow Population Growth, Boost Life Expectancy 

 

Looking ahead into the next fifty years, the authors expect declining fertility and mortality to result in slower population growth and increased life expectancy, two factors that will result in smaller labor forces, narrower tax bases and higher pressure on government finances through demand for pensions and healthcare services. 

 

Working Age Population as a Share of Total Population (%), 1960-2100(f)

 

Older Populations, Weaker Demand

 

Looking specifically at key macroeconomic variables, the authors run regressions on GDP, inflation, current accounts and budget balances.The authors find the most significant relationships between measures of demographic change (share of population over 65, share of population between 15 and 64 and life expectancy) and gross domestic product. They specifically find that, as working populations decline and life expectancy increases, aggregate demand demand decreases, resulting in slower consumer demand growth, industrial overcapacity and deflation.

 

Abenomics Intends to Boost Current Demand by Creating Expectations of Future Inflation

 

Taken at face value, this research shows why projects such as Abenomics have been so squarely targeted at attacking deflation and raising consumers’ inflation expectations. By making people believe that prices will be more expensive in future, Abenomics hopes to encourage increased consumption now. 

 

China, South Korea, Thailand Under Pressure, Policy Change Necessary

 

Countries under particular pressure in the next ten years include China, South Korea and Thailand. Given the risks of enduring a 'lost decade' similar to Japan's stagnation post-1990, it is more urgent than ever for policymakers in these countries to deliver on reforms that ease pressure on labor markets, stimulate demand from the older population and take preemptive action against deflation. 

 

 

Links:

 

Harvard: The Greying of Global Population and Its Macroeconomic Consequences

 

IMF: Population Aging and Its Macroeconomic Implications: A Framework for Analysis

 

APAC Trends: Asia Pacific's Demographic Outlook

 

 

 

 

 

 

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