Destiny and danger where demography meets finance

“LIKE anybody, I would like to live a long life – longevity has its place,” said Martin Luther King Jr in the last speech he would ever give. “But I’m not concerned about that now.” That was one of history’s greatest and most prophetic orations. In the 56 years since, humanity has moved on. People still want to live a longer life, they are increasingly having their wish, and they’re able to deploy money to make it happen. But, while longevity continues to lengthen, day-to-day most people don’t seem so concerned about it.

In the financial world, at least, that is shifting. Longevity is a full-fledged investment theme, with ambitious tech entrepreneurs even shifting from trying to increase longevity to making an attempt to conquer mortality itself. There is also ever more awkward stirring over the impact that a population that lives longer, in combination with a falling birth rate, could have on the economy.

By definition, demographics only change very slowly, making their effects easy to ignore. Wars and increasingly ugly politics make it all the harder to pay attention. But the Covid-19 pandemic aroused fears that the birth rate could decline even faster. The numbers being published for 2023 begin to suggest that those fears were reasonable.

James Pomeroy, global economist at HSBC, said: “Here comes the drop... We have been warning that birth rates could move to much lower levels in the coming years – with economic concerns, social changes and a pandemic hangover pushing more people away from larger families or having children at all. In recent years, it looks like a lot of these issues have come together – with birth rates falling sharply across the world.”

And indeed, the decline in birth rates is strikingly broad, although it does vary greatly by geography. The pandemic shook up priorities. The uncertainty doubtless led many young couples to wait longer to have children. It’s possible that this is yet another Covid-induced blip that will correct itself in time. To use that word yet again, birth rates tumbling at this rate may well be transitory. However, there are reasons to expect a structural decline for a while.

As Pomeroy points out, if couples in their 30s can no longer afford to buy a house, and if college fees down the road promise to be prohibitive, it’s only rational to put off starting a family. If people wait longer, the overall birth rate will fall. And it only exacerbates a trend towards starting families late, which began with the mass entry of women into the workforce – a trend that won’t be reversed.

Thanks to its sheer size, and to the legacy of previous crude but effective attempts to dampen the birth rate, China’s demography tends to dominate perception. As Ernan Cui of Gavekal Dragonomics has shown, Chinese births are falling much faster than recent projections had predicted. Continuing declines in the number of women of child-bearing age will likely bring them down further.

Other countries have seen sharp falls in births in the past, notably Japan, where births started to decline in 1973. The country began to lapse into its long economic malaise in 2000 as that cohort began to reach parenting age. But the decline in China since its recent peak in 2016 has been much faster.

“Demography is destiny” is a maxim attributed (perhaps dubiously) to the French “father of sociology”, Auguste Comte. If global birth rates keep falling at 3 per cent per annum, then the prospects for population growth must be changed radically. Indeed, if HSBC’s calculations are right, the peak in the world’s population is imminent, and the rest of this century will see a decline.

Few people reading need have any personal concern about the world’s population 76 years from now. And, the process of demographic change is so slow that it will have no effect on any market prices this week or the next.

Governments, however, have to plan ahead; the Philippines is hoping to enrich itself in the next couple of decades before a newly declining birth rate turns into a shortfall of labour (which will have an impact on the rest of the world, as my colleague Daniel Moss wrote last week).

With the pandemic beginning to recede into history, demography is returning to the agenda. As I wrote about back in 2016, the concern is that an ageing population, together with a lower birth rate, will put greater pressure on finance, leaving governments with a choice between borrowing far more (and raising interest rates), or allowing inflation to deal with the problem. In 2020, in the thick of the pandemic, a book called The Great Demographic Reversal, by Charles Goodhart and Manoj Pradhan, argued that a shrinking and ageing population would mean a return to secular inflation. That’s a contentious claim, and in 2021, we hosted a debate with Pradhan on the Bloomberg terminal.

All of us as humans might care about the prospects of a world in which the elderly outnumber those still in work, just as we’d be interested in any technological advances to live a longer, fulfilling life. The financial effects, while obviously profound, are harder to project. But now that the pandemic has persuaded many that secular inflation is back, it would be wise to return to that debate. Pradhan himself suggests that now is a “natural time for everyone to proclaim victory” and bury the Phillips curve again – but warns that that could be “playing into the hands of a regime change in inflation” in the not-too-distant future. It’s time to pay attention.