Changing Populations Pose These New Economic Challenges

“Demography explains 65% of everything,” said demographer David Foot of baby boom fame. If so, investors around the world – and Canada – are entering uncharted territory.

Yan Barcelo 5 June, 2024 | 1:24PM
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Global demographics illustration

Earth’s demographic projections are troubling. First, the world population will continue to grow, from a present level of 8.0 billion to about 10.36 by 2075, according to the Institut national d’études démographiques, which essentially replicates the United Nations’ medium scenario of world population growth.

By 2075, however, the world population should plateau and initiate a slow decline leading to 10.25 billion in 2100. A stagnant global population may not seem like a cause for concern, but at a country level, we find alarming declines and economic implications for long-term investors to consider.

China’s Population Could Nearly Halve

The most striking projection concerns China. Following a fertility rate that has fallen to the lowest level in the world, its population is expected to decline from a present apex of 1.4 billion to 771 million in 2100, almost a 50% fall. Other countries will experience declines, but not as drastic as China’s. Japan will move from 125 million to 74 million, and Germany, from 83 million to 69 million. India could also witness a decline starting in 2075, its population evolving from a present level of 1.4 billion, to 1.68 billion in 2075, then to 1.5 billion in 2100.

Fast-Growing Emerging Markets

Other countries will continue to grow, especially in Africa. The top performer should be Nigeria, whose population will more than double, jumping from 215 million to 546 million, making it by then the third most populous country in the world, that development bringing about its own set of challenges. The U.S. should also pursue an upward path, from 333 million to 394 million; Canada also, from 39 million to 54 million.

Global Economy Entering Uncharted Territory

Such numbers pose challenges that the world has never confronted. A most pessimistic view, often repeated, is Elon Musk’s who tweeted that “population collapse due to low birth rates is a much bigger risk to civilization than global warming.” Jared Franz, economist at Capital Group chimed in with a similar view: “We’re not replicating ourselves fast enough, it’s a historic first!”

A Goldman Sachs 2021 article spelled out a few of the darker consequences for China: a shrinking working-age population reducing potential GDP level and slowing GDP growth, the aged forming a greater burden on the economy, increased labour costs, lower savings rates, and increased consumption.

In the crucial building sector, “where China has built all these cities, stranded assets will need to be marked down,” Franz points out, The impact could be significant on households where a major part of savings are locked into homes. A market where prices sink will leave many impoverished.

Negating Basic Laws of Economics

A classic economic equation is that population increase is a key component of economic growth: more people leads to more consumption; more consumption, to more production; more production, to more tax revenues, etc. China will be going against that flow.

Canada and a number of other countries are swimming along with that flow. But Canada, according to many observers, has a problem: population growth through immigration. “You can have too much of a good thing,” quips David Rosenberg, president and founder of Rosenberg Research.

Many other voices have joined that growing chorus: “A GDP growth of 1% after the interest rate increases by the Bank of Canada is still a relatively good growth,” comments Thomas Torgerson, Managing director, global sovereign ratings at Morningstar DBRS. “But GDP per capita is weaker and that is linked to population growth.”

An immigrant immediately needs government support and a roof over his head, and he increases consumption, Rosenberg points out. That reinforces a direction of the Canadian economy that is leading it increasingly into a low-performance trap. What Canada needs, Rosenberg insists, is not more consumption and more taxes, but more capital investment and greater worker productivity, a key factor that new workers, which are on average paid lower wages, can contribute to bring down, at least temporarily. “In Canada, Rosenberg laments, we have a government that loves to attract people, but physical capital that generates future productivity growth — not so much.”

Policy Shift from Population Growth to Productivity

“Before Covid, the volume of immigration was 550,000 per year, which was already a lot, says Mathieu Arseneau, assistant-chief economist at National Bank of Canada. But above one million, as it has been the last two years, it’s disproportionate.” The last Federal budget proposed measures that would dial back population growth below 500,000, a level that is optimal, Arseneau believes. That should take some pressure off housing and services costs and allow immigration to become an economic plus again: “Bringing in younger workers is positive for the economy and alleviates the demographic challenges in the longer term,” Torgerson says.

The China Population Conundrum

Can China escape most, if not all, of the negative impacts of its demographic decline? We have to avoid the mistake of extrapolating the present Chinese fertility rate of 1.18 indefinitely in the future, advises a recent Scientific American article. The Chinese government has already put forward measures to increase it, but it remains to be seen if a more prosperous population of working women will be receptive.

Technology and productivity increases offer hope, and Japan presents a glimpse of it. Productivity is a key variable, Torgerson proposes. “Combining a stalling productivity with a declining population would constitute a big problem,” he says. “But Japan is an example of a country that has still managed economic growth, though weak, because productivity has continued to rise.”

China is presently doing the same, claims the Scientific American article, “installing more industrial robots than any other nation. There is no plausible reason to believe that China’s economic productivity will stop increasing.”

Can AI Solve the Population Problem?

Artificial intelligence could also be a major component in the productivity mix, but how it will play out is anybody’s guess, Franz submits: “There’s an interesting paradox here, he points out. The leading edge of AI is moving very fast, but companies are light years behind. A US Census study showed that only 5% of U.S. firms had in production an AI capability that was generating productive value, and that was mostly in tech and finance.” So, the contribution of AI to productivity is still an unresolved issue and few informed observers predict anything miraculous on that front.

As for the effect of AI on jobs, that is still an obscure question. Countless studies have predicted and still predict massive job losses, but real losses to this day barely amount to a trickle, Franz highlights, referring to the most recent Challenger Report, the only firm that follows the evolution of AI’s impact on jobs. Since May 2023 the Report notes, “companies cut 5,430 jobs due to AI, either because the companies were pivoting to developing it or because it replaced tasks and roles.” That’s only 1.6% of total job cuts of 322,043 in the last year reported by Challenger.

AI job Armageddon has not yet hit. AI could theoretically decimate jobs, which would not be very helpful anywhere, and especially not in China, but that’s not what it has done yet. In fact, Franz observes, “what I do see is job postings that show an increase in AI-related jobs demanding AI skills.” A declining population will not help increase people with those skills.



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About Author

Yan Barcelo  is a veteran financial and economic journalist with more than 30 years of experience, Yan writes for many publications in Toronto and in Montreal, including CPA MagazineLes Affaires and Commerce.

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