Demographics: why do they matter for your investments

10 March 2023
Demographics

Despite what lots of people still seem to think, the world we live in is in the middle of a demographic crisis, characterized by declining birth rates and an aging population. And this is a major concern for policymakers and economists around the world. This phenomenon has significant macroeconomic implications that are undoubtedly going to affect the global economy – and everyone’s investments – in the coming years and decades.

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A crisis long in the making

Several social, economic, and political factors have contributed to the current demographic environment. Here are the most prominent:
1) Changing attitudes towards family and child-rearing: more people are choosing to delay having children, or not having children at all, in order to focus on their careers or personal lives. This trend is particularly evident in developed countries, where women have greater access to education and career opportunities.
2) Increased access to birth control: as more people have access to these services, they are better able to control the timing and number of children they have.
3) Economic factors: in most countries, the cost of raising children has increased significantly, making it more difficult for families to afford to have children. In a pre-industrialized world, children were “free labor”. Today, children can be a huge economic cost and the rise of dual-income households has made it more challenging for families to balance work and family responsibilities.
4) Political factors: In some countries, policies that restrict access to reproductive healthcare services or that discourage family formation can contribute to declining birth rates. Similarly, political instability or conflict can drive migration patterns that exacerbate demographic imbalances.

Why does it matter (i.e. implications)

Lower Growth

One of the most significant macroeconomic implications of the demographic crisis is the impact on the labor force. As the population ages and birth rates decline, the number of people entering the workforce will decrease. This could lead to a shortage of workers in certain industries and a reduction in overall economic output. The demographic shift may also have implications for the distribution of skills and experience within the workforce. For example, as the baby boomer generation continues to retire, there may be a shortage of experienced workers in certain industries or professions.
There are likely to be significant implications for savings and investment as well. As the population ages, there may be a shift in the allocation of household savings towards retirement and healthcare expenses, rather than investment in the economy. This could lead to lower levels of investment in productive assets, which could in turn lead to lower levels of economic growth. At the same time, declining birth rates may lead to a reduction in demand for housing and other durable goods, which could further dampen investment and economic growth.

Inflation

The shrinking workforce may also have implications for wages and productivity. As the supply of labor decreases, employers may have to compete more aggressively for the available workers, leading to higher wages. At the same time, a shrinking workforce may lead to a reduction in productivity as employers struggle to find enough workers to meet demand. This could lead to higher costs for businesses, which may be passed on to consumers in the form of higher prices. In other words, inflation may well be a permanent feature of our reality regardless of what central bankers do with their monetary policy decisions.

Public debt and economic stability

Another important macroeconomic implication is the impact on public finances. As the population ages, governments are likely to face increased pressure to fund pensions, healthcare, and other social welfare programs. At the same time, a shrinking workforce will lead to lower tax revenues and reduced economic growth, making it harder for governments to balance their budgets. This is inevitably going to lead to higher levels of debt and deficits, which in turn could further undermine economic stability.

There are further forces at play that may compound the implications of negative global demographics, not least the ever-growing climate crisis, the war in Ukraine, and the reshaping of globalization which appears to be receding very fast towards a much less integrated world.

There are always opportunities

Despite these challenges, as always there are also opportunities for economic growth and innovation in the face of a crisis. For example, the shift towards an aging population may create opportunities for businesses that cater to the needs of older consumers, such as healthcare, leisure, and travel. In addition, there may be opportunities for technological innovation that can help address some of the challenges associated with an aging population, such as healthcare technology and robotics.
There are also policy responses that can help mitigate (at least in the long run) the negative impacts of the demographic crisis: policies that encourage family formation and support working parents, investments in education and training programs, and of course, reforms to social welfare programs.
Taking Europe as an example, there is a lot of public resistance to public pension reforms, but what the general public always fails to appreciate is that these systems were put in place when life expectancies were far lower than were they are now. With less people working and with the retirees living many more years, without reforms the current systems are unsustainable time bombs.

What a responsible investor must do (now more than ever)

Past performance is no guarantee of future results” is a warning present in every investment memorandum. We have grown used to believing that markets, in the long run, always go up. We are not here to state that this trend is about to change, but we are certainly here to say that there is a natural or divine law that states this must forever happen.
Since the end of the second World War, the western world – where most of the equity markets have been concentrated – has enjoyed very supportive and balanced demographics and markets have gone up indeed (the S&P500 alone, by 11.17% per year). But demographics have changed, and this is an undeniable fact: we already know how many people will enter the workforce in the next 5, 10 or 20 years as these people are already born. Whatever demographic policies may be implemented, they won’t be having any immediate effect.

This means that, as responsible investors, we cannot be complacent.
We need to do our research. We need to stay on top of our assets, track what we invest in, what our real investment returns are, and whether these returns are worth the risks we are taking.
This is why we have built Exirio, to give everyone a tool to track their wealth with the best possible balance between detail, precision and ease of use. And if you think something can be improved (and for sure it can!) please let us know!

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