The Daily Update - Demographics

The initial Eurostat 2015 population estimates makes for an interesting, albeit somewhat depressing, reality check.  According to Eurostat, as of January 2016 the population of the EU (all 28 member states including the UK) was estimated to have risen to 510.1m from 508.3m a year earlier.  However, the key takeaway was that for the first time ever there was a ‘negative natural change’ of the population as deaths of 5.2m exceeded births at 5.1m: net migration was the driver of population growth.

More worryingly, Eurostat’s longer term projections in the Europop2013 scenario look for only a 2.4 percent population increase between 2014 and 2080 and a concerning increase in the dependency ratio (ratio of the elderly people at an economically inactive age of 65 or over versus the number of working age people i.e. 15-64 years old).  The EU-28 old age dependency ratio is projected to increase from 28.1% in 2014 to 51% by 2080; in other words the working age to elderly person ratio will fall from 4:1 to 2:1, a sizeable drop.

Within Europe there are also signs of austerity driven ‘hollowing out’ although Ireland seems to be faring better than Southern Europe.  It has the highest proportion of young people under 14 years at 22.1% of the population and the healthiest natural change of the population where births outnumber deaths.  That said, Ireland’s crude birth rate has also been declining.  In the Southern European countries of Greece, Portugal, Spain and Italy the trends are much less favourable: there is a negative natural change in the population.  The Italian population only grew due to positive net migration in 2014 although the initial overall population estimates show the Italian population also declined in 2015.  In 2014 Greece and Portugal experienced a ‘double whammy’ effect as negative net migration compounded the negative natural change.  In 2014 Spain had net negative migration but positive natural change although the latter shifted into negative territory in 2015.  Net negative migration is particularly damaging as it tends to be the young employable workers, particularly in countries afflicted with high level of austerity and unemployment, that move overseas in search of better employment opportunities.

Inevitably, these ‘greying’ and ‘hollowing out’ trends have negative implications for growth and productivity and create greater budgetary burdens on social systems.  The IMF estimates going forward ageing could shave about 0.2 percent off total factor productivity (TFP) growth every year until 2035 in the euro area; this is significant as projected average annual TFP growth is estimated at only 0.8 percent per annum.  They expect Greece, Spain, Portugal, Italy, Slovenia, Slovakia and Ireland to be the worst affected which, in conjunction with high debt levels, will create a significant impediment to growth.

Mario Draghi acknowledges the issue of “the euro area’s unfavourable demographics” stating “Public policy can certainly help temper these effects through its role in receiving and integrating migrants. But since policy cannot do much to alter long run demographic trends, the implication is that raising long-term growth will require a complement – namely, raising productivity.”  But raising productivity is a complex issue that has probably been made more challenging with Brexit; in the sense that EU policy seeks to enhance the single market, promote scalability, create efficient labour and product markets, supported by effective financial and legal systems.

Unquestionably, Europe faces considerable demographic challenges but it is not an isolated case.  According to the United Nations, the entire populations (not just those of working age) of 48 countries or areas in the world are expected to decrease between 2015 and 2050. With demographic trends already set in stone, it is hard to see anything but weak growth going forward, and that means interest rates and inflation are likely to remain low for several decades. In that context, long-dated investment grade bonds with yields in excess of 4 percent look extremely compelling.