Author: Charlie Ruff

7.26.2024

 

“Demography is destiny”
-Auguste Comte

This week, the WSJ ran the headline “Suddenly There Aren’t Enough Babies. The Whole World is Alarmed.”
I love following demographics. The trends are slow-moving, but their impact is profound.

Let’s start with Econ 101:
GDP is a function of capital, labor productivity and the quantity of labor. In the entire modern era, quantity of labor increased with population growth.

GDP=f(capital, labor productivity, quantity of labor)

*proudly straightens pocket protector*

But what happens if labor shrinks?

Long Term Population Growth
To hold a population steady, birthrates must stay at about 2.1 per mother. 2 kids to replace the parents and 0.1 because some don’t survive to our reproductive years because of accidents and TikTok challenges.

Of the five largest economies in the world, none are above replacement. Immigration helps some (US/EU) but it can’t offset the full effect. For other economies (India/China) immigration exacerbates the problem because more people immigrate away.

Falling birthrates ⇒ declining population ⇒ declining labor force ⇒ economic impact.

Back to economics…

Demographic Dividends
The OECD defines ‘working age population’ as people between the ages of 15 and 64. This is, admittedly, an imperfect and blunt measure. For example, a 46-year-old typically generates more economic activity than a 16-year-old. There are also differences by gender- only 30% of women are active in the Indian labor force but 73% of women are active in Germany. Regardless, when a large portion of a country’s population is working age, this typically provides a powerful boost to economic growth- also known as a demographic dividend. Think of how impactful the baby-boomer generation has been in the US.

• Japan had a demographic dividend through the 80’s and 90’s.
• We are in the twilight of China’s demographic dividend.
• India is receiving a demographic dividend now.

Looking ahead, what economies are positioned well?

Remember, this is demographic data. Although 2030 and 2040 are estimates, we won’t magically find extra 40-year-olds.
2040’s working age population has already been born.

Demographically speaking, Brazil, Indonesia, Mexico, Turkey are in good shape. China stands out for its steep decline, as we’ve discussed previously. India doesn’t look as good as one might expect. India also loses some shine when you factor in low female participation & poor labor force mobility due to India’s caste system.

On the developed front, Japan & the EU are in trouble. The US isn’t great but it’s OK on a relative basis.

 

Considering the entire world (black dotted line), the next 15 years look okay, but the problem is the mix. The global economy will lose workers in highly productive economies like Japan (per capita GDP $33k) and gain workers in very low productivity economies like Nigeria (per capita GDP $1k).

Demographics are becoming a headwind for the global economy, especially for developed economies. Relative to Japan and the EU, the United States looks okay. 

For now, developing economies still have healthy labor force demographics, but China faces a very steep decline. 

 

Back to Falling Birthrates and the Big Picture…
In addition to the WSJ, the New York Times recently discussed this trend including the profound observation about the human population: “our decline could be just as steep as our rise.”

There are no examples of countries where birthrates increased back above replacement.

Governments can’t increase birthrates. Incentive programs have not had a meaningful impact. At some point, the decision to have children isn’t about money, it’s about time. As a father of two, I simply don’t have time for more lacrosse tournaments.

Yes, governments can welcome immigrants, but immigrants typically flock to countries with heterogenous cultures where it’s easier to assimilate i.e. United States, not Japan. Again, this is out of the control of governments.

Also, birth-rates are decreasing in developing economies too! As people get wealthier, they have less children. This is observable in every culture & economy.

 

What does the future hold?
Does AI and Robotics bail us out by driving economic growth without more people? Go back to Econ 101: GDP=f(capital, labor productivity, quantity of labor).

Maybe AI & robotics increase productivity enough to offset a declining labor force.

We could end up like the fat people in Wall-E where computers do all the work for us.

source: Disney

Sci-Fi plots often involve overcrowded planets & intergalactic colonies- the data doesn’t support this. After all, it’s Science-Fiction. Quick aside, Soylent Green is set in 2022!
Considering the data, in 250 years, there are likely to be fewer people than there are today.

What if humanity’s future isn’t an overcrowded dystopia but a small, wealthy population living on a clean planet? Or as Bill Burr so eloquently put it, “you get it down to like, 30,000 people… The Super Bowl comes around- everybody can go!”

 

Okay, So Tie It Back to Investing…

• Demographics are a big thing but not the only thing.
  • There are myriad other factors that impact investor returns, especially in the shorter-term.
  • For example, demographics would suggest avoiding Japan, but the Nikkei has strongly outperformed the S&P 500 over the last three years.
• Practice what you preach.
  • Cobblestone’s Global Core Equity strategy approach emphasizes diversification and a tilt towards Emerging Markets, where population growth trends are stronger. Longer term, I believe this is a positive secular trend.
• USA #1
  • The US faces some headwinds but demographically it’s in a much better position than most developed markets.

 

Disclosure:  Unless stated otherwise, views, opinions or forecasts expressed in this blog are those of the author and do not necessarily reflect those of the Adviser and/or its employees. The contents of this blog are distributed for informational purposes, and are not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in these communications is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational, and illustrative purposes.