The post-pandemic period in most economies has been characterised by skills shortages and budgetary pressure on government entitlement programs. These are consequences of demographic changes that, from almost every angle, seem likely to intensify.
The economic implications are substantial.
Advanced economies, over the past decade, have seen a decline in the share of the population that is of working age. This is only the second such fall in 150 years. In England and Wales, births have declined to the same level as deaths for only the second time in 190 years.
Baby boomers are now starting to pass 80 years of age, raising the number of society’s dependents. By 2028, Australia’s over-80s population will be rising at more than double its 2000–2020 average. At the same time, the global fertility rate has fallen to 2.25 live births per woman, only just above the replacement level of 2.1, and more than half of all countries have fertility rates below that level.
Births in the European Union have fallen to the lowest level since comparable data was first collected in 1961.
Births in the European Union have fallen to the lowest level since comparable data was first collected in 1961. This is occurring even in some developing economies, where birth rates were expected to stay high. Mexico’s birth rate is now below that of the United States.
The combination of these trends is eye catching, suggesting the global population may start to decline by the 2050s. We’ve already seen 63 countries pass peak population.
The UN’s 2024 projections ascribe an 80 per cent probability to global population peaking this century, from a 30 per cent estimate a decade ago. The revision reflects broad-based errors in its forecasts, suggesting future data could be more favourable.
Trends in life expectancy and health aren’t encouraging. In a study on ten economies with the longest-lived populations, including the United States, South Korea, Japan, Australia and Hong Kong, the authors conclude “radical human life extension is implausible this century”. While average life expectancy since 1990 has increased, the increases have occurred more slowly, and maximum lifespan has stopped rising.
Policies available to address these trends may be more straightforward for some countries. Japan’s population has been declining since 2010, but a rise in the workforce participation rate for women and those aged 65–74 has prevented the workforce from declining.
Nonetheless, policy success is rare. If it wasn’t, we would not have been so surprised by China’s economic slowdown or Germany’s emerging economic unease as its population approaches shrinkage. France and China have found it difficult to even raise the retirement age.
Raising productivity growth is the most obvious policy recommendation, but infamously difficult to achieve, as rising debt burdens constrain investment. Japan’s policies, in any case, have taken decades to just achieve partial success.
The implications of a sustained decline in world population, if that eventuates, are likely to be profound. Planning for the worst is more advisable than hoping for the best.
The balance of evidence suggests negative population growth will reduce inflation. One study of 22 countries from 1870 to 2016 found a “significant positive association between population growth and inflation”. Rising dependency ratios and falling populations typically sap economic growth, pressure fiscal metrics and increase debt burdens. Italy, China and potentially Germany more recently all show similarities with Japan’s experience.
Arguments welcoming population decline, such as one in Scientific American, typically have little or nothing to say about the rising per-capita debt burden that accompanies a smaller workforce.
These trends are also likely to contribute to geopolitical realignment. Japan was the world’s second-largest economy between 1968 and 2010. But the Lowy Institute now describes Japan as a “middle power” in Asia whose regional influence is below India’s. Germany’s position as Europe’s leading power is now in question too.
In the United States, foreign-born workers account for more than 80 per cent of the increase in US population since the pandemic.
Fiscal pressure on entitlement programs is already substantial and likely to intensify. In New Zealand, entitlement programs account for one-third of core government expenses, and in the United States, two-thirds of federal expenditure.
Successful migrant economies have some advantages but will increasingly rely on migration. In the United States, for instance, foreign-born workers account for more than 80 per cent of the increase in US population since the pandemic. In Germany, where deaths have exceeded births since 1972, the population is only rising because of migration.
Migration is likely to keep the focus on housing affordability. Equally, using the skills of migrants and other underutilised groups will become more critical. In Germany, only one-sixth of recent migrants from Ukraine have secured employment.
In Australia, a KPMG survey found 60 per cent of businesses are concerned about housing affordability and its impact on their ability to recruit. In Hong Kong, the number of primary school enrolments has declined 13 per cent since 2019. Today’s school students are the university population tomorrow’s businesses will recruit from.
The natural environment might be one beneficiary of population decline. The link between population and environmental degradation is stark. But the financial realities of demographic pressure may also mean climate is deprioritised.
While some countries have the benefit of time, the effects of population decline are already identifiable. Pressure on entitlement programs, a chase for talent in globalised sectors and challenges finding growth in some key economies are among the current manifestations. More challenges are likely.
