Demographic challenges and impact on inflation

© Kelvin Han

The global effects of Asia’s aging population

“With the dynamism of Asia, particularly China, having been so central to the success of the global economy, a key question going forward is what will be the implications of a significant aging and shrinking in the workforce within this engine of growth, both within the region and outside of it. Our work highlights consequences for global growth, inflation, and interest rates and, in turn, investors and companies”, as stated in the report issued by Credit Suisse Research Institute.

Impact on Inflation?

Will the anticipated drop in working-age population in Asia reverse the low average inflation the world has seen over the past two decades – before the recent rise – and drive another disruptive shift in global manufacturing supply chains?

“Similar to individuals saving for old age, countries with a rising share of elderly people would need a certain level of wealth to sustain their lifestyles, if necessary by importing labor and talent. This wealth creation can also reduce the burden on the younger population, which, if retirement funds are insufficient, may end up being excessively taxed so that the older population can be cared for. For example, aging populations in Europe can afford lifestyle assistance and medical care provided by foreign labor attracted to their countries by higher incomes and wealth”, as quoted by the authors of the report The global effects of Asia’s aging population (Credit Suisse Research Institute). 

Eastern Europe, China and Thailand face challenges

Credit Suisse Researchers also noted the particular challenges of Eastern Europe and also China and Thailand: “There are no countries outside Eastern Europe (which also has a well-documented aging problem) that have a higher average age and a lower per capita wealth than Thailand and China. Despite Japan having high per capita wealth, just 30% of the respondents aged 24–44 in Japan in our survey felt they would be better off than their parents. A decade later Thailand may be in a similar if not worse condition in terms of consumer confidence. In other countries we surveyed, 80% or more of the respondents felt they would be better off than their parents.”

Challenges in Asia

In several of the A-10 (Asia 10) countries, total factor productivity growth (or efficiency of use of labor and capital) has fallen in recent years, creating a headwind for global growth.

A sharp rise in the A-10 dependency ratio that could affect inflation is only likely to occur after 2035.

From making up nearly half of the incremental global workforce every year until 2010 for several decades, the A-10’s share has already dropped to a quarter and is likely to turn negative after 2032. Not only will this impact growth outlook for the A-10, but it can also have a material impact on global inflation, as well as the neutral real rate, i.e. the interest rate consistent with stable inflation, even in developed markets. But sounding the alarm based on population trends alone would be too simplistic. For example, the number of workers is not the same as working- age population, and workers have differing physical and mental capabilities, as well as work preferences.

The consolidation of Asian (mainly Chinese) workers into the global economy in the first two decades of this century has been an important contributor to a period of sustained low inflation. The analysis shows that any apprehension about a decline in China’s working-age population automatically putting upward pressure on global goods prices appears to be misplaced. The only challenge may be disruptions to productivity due to shifting trade linkages for non-economic reasons. China’s surplus labor supply represents a large buffer against the risks of non-Chinese economies being able to sufficiently train/ integrate workers into the global economy.

Geopolitical constraints on productivity growth could be the driver of cost-push inflation, not A-10’s demographic transition.

Demographic pressures are unlikely to push inflation or real interest rates higher: productivity growth and political choices like the labor share of income matter more.

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