Demographics: Dividends and Deficits

The International Monetary Fund (IMF) has noted that demographic change has significant implications for economic growth, with ageing populations likely to lead to lower productivity and slower growth. The IMF predicts population ageing could reduce potential output growth by around 0.5 percentage points per year in advanced economies over the next three decades.

Research by Professor Charles Goodhart and Manoj Pradhan has found that much of the disinflationary trends of the past 30 years can be attributed to globalisation and China. The rise of China brought hundreds of millions of new workers into the urban economy, lifting them out of poverty and boosting the ratio of workers to dependents in a demographic sweet spot. However, these forces dissipate as the world population ages and global supply chains shorten. China's working-age population is expected to fall by 2050, and the size of the youth population in China will also decline despite the abandonment of the one-child policy.

This demographic reversal will have significant implications for labour markets, with labour taking a more proactive role in a world short of workers and reasserting its position in the triangular relationship with business and capital. Central banks grappling with inflation will look to increase interest rates, while finance ministers will resist the pressure from mounting debt and pension costs. Proof, if needed, can be seen in the angry reaction of French voters to President Macrons' attempts to increase retirement ages and encourage French people to work for longer.

Charles Goodhart and Manoj Pradhan note:

Personalised medicine is another area where AI is set to make an impact. Systems can analyse a patient's genetic information, medical history, and lifestyle factors to provide tailored treatment plans, increasing the likelihood of successful outcomes and reducing the risk of side effects. Virtual health assistants, such as AI-powered chatbots and voice assistants, provide round-the-clock support, answer health-related queries, and remind elderly patients to take medications or attend appointments, improving treatment plan adherence and overall well-being.

As the population ages and the demand for new goods and services evolves, there will be increasing opportunities for innovation and entrepreneurship. Entrepreneurs and businesses that can anticipate and respond to changing demographics will be well-positioned to capture new markets and drive growth. Still, this is already happening in the later life care sector, where Europe-wide shortfalls in personnel are beginning to bite, and public sector investment shortfalls are being addressed through private capital investment.

Moreover, with more older workers remaining, there will be opportunities for intergenerational knowledge transfer. Older workers can share their skills and experience with younger workers, helping to build a more skilled and productive workforce.

As populations age, there may be a shift in social norms and values. The change will present opportunities for increased social cohesion and civic engagement as older individuals, post-retirement, become more active in their communities and work to promote social and environmental causes.