Aging Populations Will Lower Global Growth, But Some Bright Spots Exist in Asia Pacific

From now until 2020, global economic growth is unlikely to return to pre-crisis levels – that’s the message from the International Monetary Fund’s recently released World Economic Outlook. According to their analysis, demographic change and population aging lie at the heart of the problem, since the two factors will slow employment growth and reduce the workforce size, thus reducing potential output.

Advanced economies will face the most pressure, with no net employment growth expected between 2015 and 2020. The IMF study measures net employment growth by adding growth in working age population to the decline in labour force participation due to aging. According to their analysis, Japan and Germany will see a 0.2% annual decline in working age population between 2015 and 2020, with Canada seeing a total decrease of 2% in work force participation during the same period.

Advanced Economies' Employment Growth Outlook(%), 2002-2020

Source: IMF World Economic Outlook, April 9, 2015

The situation looks slightly better in emerging economies, where employment growth is expected to average approximately 0.2% per year between 2015 and 2020. However, this marks a distinct slowdown from the 1.5% and 0.8% annual growth seen from 2002 to 2007 and 2008 and 2014, respectively. During these periods, places like China benefited from the downward pressure on wages that came from a growing labor force, a key factor that attracted inward investment. In the future, China, Russia and Brazil will be hit particularly hard and face growing wage levels and increased welfare funding needs, since they are facing rapid drop off in working age populations and an increase in elderly citizens.

Emerging Economies' Employment Growth Outlook(%), 2002-2020

Source: IMF World Economic Outlook, April 9, 2015

For the Asia Pacific region, we have previously pointed out that South Korea, Japan, China, Singapore and Thailand will face the most pressure from population ageing and declining working age population, which will likely put upward pressure on wages, particularly in the manufacturing sector. In contrast, the Philippines, Malaysia, India and Indonesia will fare better since they have comparatively younger populations and larger workforces.

Asia-Pacific Working Population Trends, 2011-2099

Source: UN, Bank of America, 2013

In sum, demographics is having a distinct effect on the global economy, making it unlikely that the heady growth of the 2000s will be seen again. This will put governments and corporates under pressure, making efforts to raise retirement ages, control public pension funding, increase labor forces and promote capital-intensive industries more likely.

Some Asia-Pacific nations will see demographic challenges, making reform and structural economic change an absolute necessity, and lower growth increasingly likely. Purely from a demographic viewpoint, countries such as the Philippines, Malaysia, India and Indonesia have a brighter outlook and will likely see steady, if not increased growth, in the coming years.

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