The Hidden Trend Behind Population Growth
Imagine you just landed in a foreign world which you have no previous knowledge whatsoever of its history, population, economic/monetary/financial structures, culture or productivity.
If you are asked to make an economic forecast and would be given only one indicator upon which to base your prediction, what indicator would that be?
The answer, invariably, would be demographics.
As people at different ages have specific needs, such needs would dictate the types of goods and services that would be in relative demand. The make-up of the population by age groups, or demographics, therefore, determines both the stock (the quantity of certain population segments) and flow (the changes in sizes of various population segments) of demand for different goods and services.
Much of the world’s economic growth since World War II, until 2008 when much of the growth was debt driven, can be attributed to population growth. However, the growth in the world’s nominal population masks a steady change in demographics which has been unfolding for decades. If demographic is the single most important factor driving economic growth, then the forces to be unleashed by evolving demographics will also have a profound impact on our future economy and assumption on growth – and our planned economic activities and the pricing of all assets based on such assumption.
In order to better understand the underlying trends, one needs to peel off successive layers of the onion. Econimica has done an in-depth analysis dissecting this topic with tremendous amounts of supporting data and charts. The series of articles on the website dedicated to this topic is condensed herein but is well worth a read individually and can be found at the end of the article.
World Population Trend
Let’s start by having our view zoomed out to the max. World population has grown from 2.5 billion in 1950 to 7.35 billion in 2015, and is expected to grow further to 11.2 billion by 2100.
So there are people as far as your eyes can see. Just imagine the stress these people would place to our food system, water supply and the ecosystem in general. So your immediate reaction would be: are we talking about over-population or something else?
Let’s peel off the first layer by separating the population of Africa from the rest of the globe (ex-Africa).
Why not Africa, you may ask?
Because from an economic viewpoint, i.e. in terms of its contribution to the global GDP, economic output, demand on energy and resources, the continent is pretty much a non-factor. Unless and until there is a material change in the economic structures in the African countries vis-à-vis the rest of the world, it would be pertinent to exclude this region when it comes to analyzing how the unfolding demographic trend affects the ‘global’ economy.
With that out of the way, the first graph below showing the global population versus the population minus Africa. Ex-Africa, the global population is projected to peak from the current 6.16 billion to between 7.3 billion around 2060 on the high side to 6.6 billion around 2040 on the low side. In other words, in 2016 we are almost reaching that peak if we end up on the low estimate.
Further breaking down the world ex-Africa population between 0-44 year-olds and 45+ year-olds, the picture looks even more interesting. The following observations can be made based on the following two charts:
- The current level of 6.2 billion is not far from the projected peak of 7.3 billion (the high end estimate).
- More importantly, the growth is in the 45+ age group only.
- The 0-44 group will peak at 4.29 billion in around 2025 from the current 4.24 and will start declining beyond that point, even though the population continues to grow until around 2060.
- The 0-44 group population is more or less at its peak just about now.
The reason for breaking the population into these two groups are pretty obvious but bears repeating. As units of consumption, people at different ages are not equal. People from 0-44 make babies, form households, collect stuff, eat more, … you name it. 45+ year-olds stop making babies (the clock stops for women), drive less, eat less, want to downsize, Toys R Not Us…. You get the picture.
Again, we are talking about stock and flow here. Whereas consumption continues to expand for one group, it is flat or declining for the other – assuming the segment populations stay constant.
The Headwaters: 0-4 Year Olds
Looking further upstream along the age spectrum, the following charts give you an idea what the headwaters look like – the 0-4 year-olds.
The chart below shows the 0-4 year-old population in OECD, China, Russia and Brazil, taken as a group, versus the rest of the world. Here are some observations:
- The 0-4 year-old population for this group already peaked in 1990 at 246 million.
- Compared to the period of 1950-1991 during which the 0-4 year-olds population went up by 246 million, it decreased by 56 million from 1991 to 2016. Another decrease of 27 million is expected from 2016 to 2030.
Now we look at individual countries and regions. The first chart below breaks down the US population between under 15 year-olds and over. Despite the total population increase from 135 million to 255 million from 1965 to 2013, the headwaters barely budged – from 59 million to 61 million.
Elsewhere, the 0-4 year-old population in the EU peaked back in 1967 and has gone down 29% from that peak by 2016.
In Japan, the peak was reached in 1951 followed by another minor peak in 1975 with 4.9 million, representing a 58% decrease from its peak.
At 18.3 million, Brazil’s 0-4 year-olds peaked in 1986 and has gone down by 28% by 2016.
Even for mighty China, theirs peaked at 139 million in 1991 and has decreased by 35% by 2016.
Similarly, India reached its peak at 121 million in 2006 and has plateaued with a slight decrease since.
Looking further upstream still, the charts below show the fertility rate in different countries and regions. Note that the common consensus is that a fertility rate of 2.1 is needed to maintain a constant level of population.
The chart below shows that the fertility rate for US, EU, Japan, Canada, South Korea and Brazil have all dropped below 2.
And the US birth rates changes in 1990 versus 2007 versus 2015 across different age groups – from slightly higher for 35-39 year-olds (women having children later) to flat for 30-34 year-olds, to down for 25-29 year-olds, really down for 20-24 year-olds (couples having fewer children) to significant down for 15-19 year-olds (better sex ed?).
Everywhere you look, it seems the same dynamic is at play here. The input into the population stream is diminishing. This phenomenon started to emerge decades ago and gradually spread to all developed and the majority of developing economies.
What we are witnessing right now – the growing population (as far as ex-Africa is concerned) is a classic pig in the python case. The existing population continues to grow by virtue of the inhabitants aging and not dying – yet. The growth is not supported by new births at a level which would replace the existing population when they eventually die.
Another analogy would be trying to reverse course on an oil super tanker. The engine has stopped some time ago and is now in full reverse. However, due to its sheer momentum, the tanker will continue the direction of its current path for a few kilometers before finally reversing course.
As the existing population dies off over time, the world will begin to see a material decline in global population.
All in all, based on the current population stock, the relative sizes of the 0-44 and 45+ year-old segments, the 0-4 year-old headwaters and the fertility rates, the following sums up what is likely to happen for the next few decades when it comes to consumptions and the economy:
- The absolute quantity of consuming units (people) might stay relatively constant and elevated for some time, but the average consumption per consuming unit is in permanent decline.
- At some point, the absolute quantity of consuming units will also begin to decline. From then on, both the nominal quantity and average consumption per unit start to decline.
- This is not meant to be portrayed as bad news. For one, we deliberately leave Africa out while doing the math. Moreover, we are still talking about a lot of people even in countries and regions ex-Africa, and the population level will remain elevated for quite some time until the aged finally die off. In the meantime, the stresses which overpopulation places on the food system, water supply, natural resources and the ecosystem in general remains critical.
Which brings us back to our opening proposition about demographics and economic forecast.
Demographic Shifts, Peak Debt and Monetary Reset
If demographics is the single most important factor driving the economy, and, as such, the growth of the 0-44 year-old population in the 1960s to 1990s is the most significant factor attributable to the global economic boom during that period, then it stands to reason that the shrinkage of that same age group from the 2000s onwards would present stiff headwinds to the same economy.
To wit, the world had been reaping the tailwinds of between 200 and 300 million additions of 0-44 year-olds in each of the 5-year periods from 1960 to 1990, resulting in one of the greatest boom periods in history.
From 2000 on, the growth in this age group has been substantially reduced, in exchange for a significant uptick in the 45+ year-olds population growth. The headwinds presented by the reversal of growth patterns of the two age groups would provide an almost insurmountable challenge to our assumption as well as dependence on interrupted economic growth.
Does it mean there won’t be growth in any segment of the economy? Of course not. To be sure, there will be winners and losers as the demographic shifts unfold. The healthcare industry will grow for sure, but don’t expect much consumer goods demand growth from the 45+ year-olds.
The world has been indulging in a debt binge since the 1990s in order to maintain the illusion of economic growth in the absence of organic growth. As if this demographic shift is not challenging enough, now governments, corporations and individual are approaching peak debt.
Part 1 of the peak debt outlines the logic for this phenomenon and examines one of the debt components – household debt starting with mortgage debt.
The twin forces of peak debt and demographics, further fueled by misguided monetary policies (zero/negative interest rates, quantitative easing aka money printing), means that we are past the point of no return on the path of monetary experiment and are coming to a dead end. To make matter worse, our entire economic construct and its pricing of assets are predicated upon the assumption of uninterrupted economic growth – an assumption which looks increasingly shaky. At this point, a next financial crisis would probably trigger and force a monetary reset to reboot the global economic system.
When the reset will take place, what the triggers would be, how the reset will take place and how different segments of the population will be affected remains difficult to predict, but at this point the reset is pretty much baked into the cake.
Conventional economists and monetary practitioners take it as gospel that economic growth is both a necessity for our well being and something which can be projected indefinitely into the future. The end of growth as we are now witnessing, then, would fundamentally alter the constructs upon which our economy is based, with far reaching impacts.
All images in this post are from the above the articles above.