We follow on from our last daily.
If unaddressed, Moody’s suggest that ageing will drive a gradual widening of deficits into the 2030s, where deficits reach around 5% and 7& of GDP in Italy and Japan. Perhaps more worryingly, ageing related spending will consume nearly ½ of general government revenue for the worst 6 nations (Greece, Italy, Austria, Japan, Portugal and Spain) by 2030.
As for the future, they go on to say that healthcare, social services and pension reform may be challenging, especially if unaccompanied by revenue gains and any such reforms will likely be most challenging where the government footprint in healthcare is larger (Portugal, Spain and Italy pay the lion’s share of healthcare costs economy-wide), and overall fiscal positions are weak.
From a potential positioning perspective, whilst Japan raises red flags with its demographic problems, from a Net Foreign Asset perspective, at least the country is more “Wealthy” to start with, although the same cannot be said about some of the other countries Moody’s mentions in the report, such as Italy, Greece, Portugal and Spain.
Whilst most countries have ageing populations, our own analysis suggests that countries such as Saudi Arabia, Mexico and Qatar will be affected the least, as for example, by 2050 their new “aged” populations will be where Korea’s currently was (41) and well below that of Japan (47) in 2015.
Clearly, the current economic environment does not bode well for government reforms via potential revenue gains right now. However, the problem is here to stay and over the longer term, unless combatted, ageing populations require higher health care and pension spending, can shrink the labour force, lower productivity growth and tax revenue, which lowers economic growth in turn affecting social security contributions which will all have a negative effect on government finances. Those countries currently not “wealthy” will continue to face headwinds as this problem unfolds.