Brexit isn’t the biggest economic problem our children will face

The exit of Great Britain from the EU has earned scare-mongering headlines worthy of a zombie attack. As we’ve written, Brexit is a step away from globalisation, and will hurt global economic growth. But the bigger threats to the global economy come from slow-burn challenges, like the ongoing slowdown in productivity.

But an even bigger challenge is this: There aren’t enough young people in the world. Right now we’re living through the biggest demographic change in history – which will hurt economic growth for generations.

For the first time in human history, we are arriving at “peak youth” – the number of people over the age of 30 outnumbers those who are under the age of 30. And the number of people who are 65 or older are likely going to outnumber children under 5 years of age by 2020.

Young Children and Older People as Percentage of Global PopulationTrueWealth Publishing

This global shift in age demographics will affect GDP growth in countries all over the world. That’s because the global workforce will shrink as a higher percentage of the population is past working age. Fewer workers is a major cause of lower productivity and slower GDP growth. And workers face a greater burden to support a rising aging population.

Longer lives + shrinking labour supply = trouble

Global life expectancy is expected to reach 77.1 years by 2050, compared with 48 years in 1950. That means over a period of 100 years, life expectancy will have climbed by 29 years, or 60 percent. The global population of those 60+ years is expected to grow to 2.1 billion, compared with 901 million today. Asia will account for two-thirds of the increase in old people. China will see the biggest increase in the world, with 21 percent of the world’s increase in 60+ year-olds.

That kind of extension in human longevity is an extraordinary achievement. It’s also an extraordinary burden.

One way to look at the impact this will have on global economies is through support ratios. A country’s support ratio is the ratio of its working age population (15-64 years) to its old-age population (65+ years). It reflects how many workers “support” – via an economy’s social support system – old people.

The global support ratio has steadily fallen, from 12:1 in 1950, to 8:1 in 2013. In developed economies it stood at 4:1 in 2013. Meanwhile, fewer new workers are entering the workforce. The support ratio in developed economies is expected to fall to 2:1 by 2050.

Some economies are hitting a critical point this year when for the first time since 1950, the number of people aged 15-64 will decline in absolute terms. The workforces in Japan, Italy, and Germany have already started to shrink. Japan may see its labour supply shrink by 1/3 by 2050. Since doubling in size over the 45 years ended last year, China’s labour supply likely began to shrink in 2015.

What happens to growth?

From 1964 to 2014, global GDP grew by about 500 percent. That growth was fueled by major increases in productivity and rapid growth in the workforce.

But global GDP growth will struggle as the labour pool starts to shrink, and as productivity growth declines.

Management consultants McKinsey & Company suggest that average global economic growth will fall to 2.1 percent over the next 50 years, compared to 3.5 percent in the previous 50 years. During that time, growth in productivity and labour contributed roughly equally to economic growth. But they forecast that labour growth will nearly vanish as a source of economic growth, as shown in the figure below. And given current trends, predicting that productivity growth will make up the difference is very optimistic.

Annual GDP Growth Due to Productivity and LabourTrueWealth Publishing

Is there anything good in this huge demographic shift? Although the labour force will be increasingly burdened by supporting a larger number of old people, it will also support fewer children. In addition, savings may build up leading to more possibilities for investment.

Also, slowing labour and productivity growth may force companies and governments to search for innovative new ways to drive economic growth. New policies and approaches – particularly focused on technological changes, robotics and artificial intelligence – may further improve the quality of life as the global economy finds its way.

But it’s hard to find a silver lining. And lower growth will become a new normal in coming years.

http://www.businessinsider.de/brexit-isnt-the-biggest-economic-problem-our-children-will-face-2016-7

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