The Daily Update - Demographics and South Korea

Data from Statistics Korea continues to highlight South Korea’s deteriorating demographic profile. Finalised data for 2018 show only 326,800 births down 8.7% yoy, the lowest reading since the data series started. In 2018 the total fertility rate (the average number of babies born by a woman aged between 15 and 49 years) also fell to 0.98 down from 1.05 in 2017: this is the first time the yearly figure has fallen below 1 and it falls well short of the replacement level of 2.1, a level required for Korea to maintain its headcount. By way of comparison, Japan’s total fertility rate was 1.42 in 2018 and the average of the OECD countries was 1.68 for 2018.

In spite of a range of government initiatives, over the past decade, to try and boost births the trend looks set to continue: in the first half of 2019 South Korea’s births plunged to 158,524 babies born down 7.7% yoy and Q2 was particularly weak as the fertility rate fell to a low of 0.91.  

This is important as without sufficient immigration an ageing population constrains labour force growth and in the absence of sufficient productivity gains, this will constrain the growth rate of potential output. Statistics Korea estimate that Koreans aged over 65 could reach 18.79m or 38.4% of the population by 2047.  UN estimates show the average (median) age of Korea’s population will increase from 41 in 2015 to 54 years in 2050 compared to an increase from 47 to 53 for Japan. UN data shows working age populations for both Japan and Korea showing declines of ~31% between 2015 and 2050.

But demographic challenges extend well beyond South Korea and Japan. 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.  One of Stratton Street’s core beliefs is that secular trends such as demographics are constraining growth rates: declining growth has been matched by declining inflationary pressures and lower interest rates.  We do not see a reason for this trend to be derailed.

Meanwhile, the negative repercussions of extended trade tensions on economic growth are becoming increasingly evident as the Trump administration’s hard-line approach continues. Not forgetting South Korea and Japan are caught up in their own trade impasse, with South Korea being removed from Japan’s export white list, effectively a preferential trade partner status, on Wednesday this week. Faced with this uncertain backdrop, the global economic outlook looks likely to remain under pressure suggesting there is plenty of scope for bond yields to head yet lower still.

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