Thursday, August 7, 2014

07/08/2014: Slow economic growth forecast based on an aging population

The unprecedented pace of aging will impose a demographic tax that will slow economic growth over the next 20 years in both developed and emerging market economies, as working-age populations shrink and household savings rates decline, says Moody's Investors Service in a Special Comment in a report just published.

"Demographic transition, frequently considered a long-term problem, is upon us now and will significantly lower economic growth," says Elena Duggar, a Moody's Senior Vice President and one of the authors of the report. 

"Estimates show that aging will reduce aggregate annual economic growth by 0.4 percentage point in 2014-19 and by a much larger 0.9 percentage point in 2020-25," continues Ms Duggar.

"Policy reforms in the medium term which improve labor participations rates, streamline migration, and improve financial flows can partially mitigate the impact of aging on economic growth. Further, in the long term, innovation and technological progress that improves productivity have the potential to lessen the forecasted dampening effects of the rapid demographic changes," adds Madhavi Bokil, Assistant Vice President and another author of the report.

Aging is not just a developed-world problem as it is generally believed. Many emerging markets are already classified as aging. Countries like Russia, Thailand, Chile and China have rapidly deteriorating demographics. Even relatively young countries such as Brazil and Turkey are aging. Moreover, the pace of aging in some of these countries is more rapid than in developed economies.

Moody's notes that by next year, over 60% of Moody's-rated countries will be aging, with more than seven percent of their population aged 65 or over. By 2020, super-aged societies (populations with more than 20 percent elderly) will increase to 13 globally from three today (that is Italy, Germany and Japan). By 2030, 34 countries will be super-aged.

Moody's projects that growth in the working-age population of the world during 2015-30 will only be half that of the growth during the previous 15 years (that is 13.6 percent vs. 24.6 percent). All countries, except a handful in Africa, will face either a slower-growing or declining working-age population.

Worldwide aging will reduce economic growth via lower labor supply, and decline in savings rates that will reduce investment. It is estimated that a one percentage point rise in the old dependency ratio (that is the ratio of the population aged 65+ to the population aged 15-64), an indicator of aging, will lead to a 0.5-1.2 percentage points decline in the average savings rate which will affect investment adversely.

Read more HERE.

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