The topic of demographics doesn’t receive much coverage by market participants. This may be because in the context of ever shortening investment horizons, writing about demographics is akin to watching paint dry. However, what this subject lacks in velocity, it makes up for in sheer magnitude of impact. There is also the additional benefit brought by the certitude of the story already having been effectively foretold; you can’t, after all, produce a 18 year old human being except in 18 years’ time!

Why write about this right now? After a pandemic related delay, the UN has finally published its latest global population projections and the numbers certainly tell their own story.

In order to keep the analysis manageable and conclusions digestible, we focused our work on nine major economies which together account for c. 70% of global GDP. These countries are (in order of GDP size) the US, China, Japan, Germany, India, the UK, France, Italy and Spain. We also focused our analysis on one key metric, the decadal growth in available national workforce (defined as the population aged 20-59 years). In order to understand how the current decade is likely to be different versus the recent past, we then compared this projected change for the 2020s with the 2010s. The results are illustrated in the table below:

There are a number of important macroeconomic implications of this data:

1. The growth in the working age populations across these key global economies is expected to slow from a cumulative 7% in 2010-2020 to just c. 1% in the 2020-2030 period. On an annualised basis, this represents a slowdown from 0.7% annual growth in the 2010s to c. 0.1% in the 2020s, or a headwind of c. -0.5% p.a. To the extent that economic growth is ultimately a function of resource availability (of which labour is one key component) and total factor productivity growth, these numbers suggest the coming decade is likely to see even lower GDP growth than the last decade, at least in real terms, unless we embark upon a quite sizeable productivity boom very soon.
2. The dispersion of growth across major Western economies is likely to accelerate rather than converge. Taking the US and Western Europe for example, the numbers above suggest that all else equal, the US should grow c. 0.4% faster per annum than key Western European countries in the coming decade versus the last. This is because its demographic headwind is c. 0.4% lighter than that faced by the major European countries. It is worth noting that this represents incremental change versus the last decade; which is to say that theoretically at least, US economic growth is likely to outpace Europe by a greater magnitude in the 2020s than was the case in the 2010s. This could have potential implications for relative returns across rates and currency markets.
3. As a corollary of the above, Europe’s real economic growth could be slower in the 2020s than the last decade. For example, Germany and Italy are likely to face an almost 1% incremental headwind to growth from demographics in the 2020s versus the 2010s, which could potentially put further pressure on peripheral debt sustainability in the coming years.
4. The Chinese economic model could be changing in front of our very eyes. China saw c. 15% growth in its working age population between 2000 and 2010, which then slowed to just 0% in the last decade. The coming decade, however, is likely to see China lose almost 10% of its workforce, representing an incremental annual headwind of almost c. 1% to economic growth. Such an acute shock could have far reaching implications for the Chinese economic model. Indeed, the UN’s projections for China show a close similarity with Japan when the two countries’ demographics are charted from their respective peaks.

The question this represents is whether China can continue to act as a source of demand for the global economy (commodities, European exports etc.) if it is running out of workers to support future credit led economic growth.

The overarching macroeconomic conclusion of this analysis for most major economies is one of continued resource constraints limiting potential future growth. Whilst energy and raw material constraints are currently the topic de jour, this analysis suggests the need to acknowledge that labour (or lack thereof) will likely represent an even more binding constraint on economic growth going forward. Failure to accept this reality could result in pushing on a string, i.e. policy hyper-stimulation resulting in inflation but not real growth.

What can countries do to reverse this particular tide? One solution is to become serious about productivity. It seems clear from the above that we need a shift in Public Policy from near-term demand stimulation to long term supply-side reforms. In other words, we need a new productivity boom to sustain robust economic growth in the coming decade(s).

On the demographic front, policies which help “fix” the structural problem of low and falling fertility rates will help, but even if they work, will only make an impact in 20-30 years’ time. Otherwise, immigration represents the best recourse for policymakers, assuming that societies are willing to accept that as a solution. Indeed, the US’s relative outperformance versus Europe and the Far East stems in large part from its relatively open attitude towards immigration historically. Thereby lies the potential solution – if politically feasible – for the demographically challenged societies of Europe and the Far East. Europe, in particular, remains an attractive destination for skilled migrants globally, and has shown the ability to accept immigration in the past. It could therefore potentially resolve this problem more readily than the more closed East Asian cultures.

At a microeconomic level too, there are a number of important implications to consider. For example, the size of the under 4 population (aged 0-4) in China is projected to shrink by c. 40% between 2019 and 2030, whereas the 60+ population across the five major European economies (Germany, the UK, France, Italy and Spain) is expected to grow by c. 20% in the same period.

Such wide disparity in projected demographic (and hence demand) trends is likely to have material implications for business models. For example, the infant formula industry has already felt the downdraft of declining demand in China and these projections show that if anything, things are likely to remain difficult in the coming years. On the other hand, businesses benefiting from ageing populations, such as the OTC (over the counter) consumer health industry, are likely to benefit from sustained demand growth.

At an individual company level, for example, it is interesting to see Reckitt’s recent capital allocation decisions – to exit and take a material write-down on its Chinese Infant Formula business and recycle the released capital into a fast growing OTC pain-relief brand – in this context.

Finally, at a strategy level, this under-analysed dispersion in end demand trends should offer long-term stock pickers material opportunities to generate alpha. Trend following and backward looking investing, on the other hand, could potentially miss these inflection points. We believe our European strategy is well placed to benefit from these opportunities, whilst also avoiding the likely pitfalls of these adverse developments.

Disclaimer: The views expressed herein are the views of the European Long Only team and not necessarily of Lansdowne Partners (UK) LLP as a whole. The content of this Article has been prepared by the European Long Only team alone and is not, and has not been endorsed or approved by any other person. The article and the information, statements, opinions, interpretations and beliefs contained in it are those of the European Long Only team and are provided in good faith, but no representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the contents of the Article, and no person shall be entitled to place any reliance on the Article or its contents. This Article is not intended to be, nor should it be construed as, investment, financial, tax or legal advice, or a recommendation to buy, sell or hold any security or other investment or pursue any investment strategy. Neither this letter nor any of its contents constitutes an inducement, offer or solicitation to purchase or sell any securities.