Are population demographics a key risk factor for investors?

As more data emerges on changing populations, there is the risk that shrinking birth numbers in the developed world indicate a host of wider issues.

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Low birth rates and declining populations are a demographic issue that could hamper economic growth.

The ageing population in the developed world has now begun to spread into middle-income countries, especially in parts of Asia. 

“We are living through a period of dramatic population change all over the world – with birth rates falling quickly, populations ageing at unprecedented rates and migration becoming ever more important to near-term population changes and labour markets,” said HSBC Global Research in a new paper launched, called “Demographics: A key driver of everything”, which focused on birth rates and how ageing populations and shrinking workforces could be a huge river over the course of this century. 

In the report, HSBC said that these changes, “no matter how timely and current they are”, often made people think about demographics as a topic to worry about over a 10-20-year time horizon rather than as an issue that will “[influence] almost every facet of the global economy every single day”.

"“We’re [now] seeing the fastest growth rate in pensioners
around the world."

One example of that was India overtaking China as the world’s most populous country as it hit 1.4 billion people last year – whilst China struggled to get its birth rate to replacement level and its population fell by 800,000 people. Others have also noted that China’s demographics point to a weakened economy in the long run and that investors might have to look elsewhere for emerging markets that show promise. 

This comes as the after-effects of the decades-long ‘one-child’ policy means that China’s population is ageing faster than in developed western nations such as the US and Japan. Nearly a quarter of the population in the country is now 65 or older.

One contributor to the report was James Pomeroy, Global Economist at HSBC, who has spoken at Insurance Investor Live | Europe on the topic of global population demographics. 

“We’re [now] seeing the fastest growth rate in pensioners around the world,” said Pomeroy in September 2023 when he delivered a keynote at the conference. This meant, he said, that pension funds will need to invest for a greater number of individuals over a longer period – shifting allocation strategies significantly. 

“There are big questions over how big the world population could become,” Pomeroy said at the time, as birth rates continued to stay high in parts of sub-Saharan Africa. 

This drastic shift has seen the nation grapple with larger, existential questions about its future needs. It has also put a massive strain on the country’s workforce and economy, which will likely worsen in decades to come.

“Given the increases in life expectancy in the emerging world, the world’s population aged 65+ is growing at the fastest rate in history,”

These conditions extend into other countries, too. In 2020, the US census showed that 1 in 6 people in the US were 65 and over. The older population reached 55.8 million, or 16.8% of the population of the US in 2020.

In Japan, the rate is 28.5%, and in other countries and major economies, such as Italy, it is 22.6%. Germany is 22.3% and France is 20.5%. “Given the increases in life expectancy in the emerging world, a post-second world war baby boom in the developed world and a steady decline in global birth rates, the world’s population aged 65+ is growing at the fastest rate in history,” said the report. 

Currently, 17 countries in Europe have declining populations – almost all of the former communist countries, as well as Greece, Portugal, and Italy. 

HSBC said the issues extend beyond that one-to-two-year window as “a number of ageing and cohort effects means that this rapid demographic change will continue to affect the speed at which other thematic changes in the global economy happen”. 

What will it mean? 

“We’re seeing a slowdown in growth of the world’s working-age population – particularly in the developed world, where lower birth rates for longer are playing a key role,” said HSBC. 

This, in turn, could lead to shrinking economies and a huge upswing in reliance on robots and artificial intelligence to fill the working age gap. 

It would also put huge pressures on pension systems in many countries.

Pomeroy said that digitalisation and automation were major investment trends of the future, especially post pandemic. “Because of Covid-19, we’re going into a wave of automation,” he said. “But it’s important to remember that boring robots really matter.” 

The category of so-called ‘boring’ robots, explained Pomeroy, encompassed all the seemingly small technological advances that make life, as people today know it today, what it is. They included everything from computers and smartphones to automobiles and cash machines – which, for many, have made additional technological advancement possible and, in some countries, have helped alleviate poverty.

“In some economies the change is more
apparent than others."

“You cannot forget all the boring robots that people are already used to,” added Pomeroy. 

“In some economies the change is more apparent than others,” said the report. “There could be a massive slowdown in population growth in the coming decade (like in much of Asia), a faster decline of the working-age population (like in Taiwan or Italy), or the working-age population now set to decline having not done so previously (like in Korea, Singapore or Poland).” 

What about in the developing world? 

The vast population growth in many developing countries would lead many to believe an over-abundance of young people, which creates the opposite problem – a large and restless youth population who want good jobs and economic stability. However, when breaking down countries in a more nuanced manner there are many developed countries with slowing population growth. 

Countries like South Africa, the most developed nation in Sub-Saharan Africa, are experiencing this, too. The estimated population of South Africa included more than five million people aged 60 or older. This represents a 9.2% share of the overall South African population. Also, more than half (60.9%) of South Africa’s elderly population is female, which further complicates matters as it could impact poverty rates. 

The United Nations has forecasted that South Africa will join the “population ageing” club as early as 2030. By around 2060, it will be home to an “aged” population – with seniors accounting for 14%. 

“The striking thing for many economies, on top of the change in the working-age population, is the rapid change in the number of retirees,” said HSBC’s research. They used 16-64 as working age for their basis, but added the actual working and retirement ages will vary by economy – and, in practice, many people are working well-beyond the age of 65 as a result of the changing nature of work away from primary sectors and heavy industry to more services-focused employment. Better health outcomes are also a factor. 

“For many EM economies, the rapid growth in the number of over-65s is set to become a problem for the first time in this decade. Although as a share of the population these numbers are still low compared to developed market counterparts, the fact that these economies are still expected to see growth of 4-5% per year in that older cohort will create some economic challenges.” 

This issue was highlighted in the World Economic Forum’s (WEF) Global Risk Report 2024 in January when WEF’s Managing Director, Saadia Zahidi, said that the difference between developed and developing economies would likely become more stark in coming years, which could be detrimental to those investing in emerging markets, as a lack of access to green technologies could stall progress.

“We’re hitting some key tipping points, where the structure of
populations starts heading towards Japan’s.”

In a worst-case scenario, Zahidi warned, there could be a stagnation of living standards in the developing world that eroded the social contract between citizens and government built on the idea that “every generation would have a better life than the one before it”. 

“We’re hitting some key tipping points, where the structure of populations starts heading towards Japan’s,” said HSBC. “For example, the share of the world’s population that is over the age of 65 is currently around 10%, and this is set to start rising quickly in the coming years. In developed markets as a whole, this figure is set to go from ~15% today to double that in the coming decades, creating some [challenges].” 

The report added that the only economy whose demographic profile looks ‘better’ (or, at least, “less bad”) in the coming decade compared to the prior one is Japan. This was “simply because the worst has passed on many metrics”. 

These demographic changes will lead to increased numbers of pensioners, which could affect the pension markets and their ability to invest money in the wider economy. 

The lower working age population could also mean possible slower economic growth and a restless youth population who could feel marginalised. There could also be issues with technology and migration.