An aging population is having an impact on economic growth in many countries, including the United States, Germany, and Japan.
An aging population can restrict economic growth as a result of a smaller supply of labor. Economic growth is directly proportional to labor growth and productivity. Low growth in the work force implies less consumption and, therefore, less demand for products and services. Intuitively, this shift also leads to less capital investment, and the vicious cycle continues.
How Is This Article Useful to Practitioners?
The author highlights a critical consideration for investment practitioners assessing future returns on investments. Investment returns are positively related to economic growth. A younger work force will point toward a relatively more vibrant economy than an older work force will.
Another interesting factor the author highlights is that an aging population tends to save more and thus consume less. But, ultimately, the population crosses the retirement age and starts using the savings, with a positive impact on interest rates. At this stage, liquidation of assets acquired in the high-savings years also occurs. In the case of foreign investments, the potential outflow from the affected country is also a point of consideration for investors in that country.
Population demographics have economic relevance and can also highlight potential areas of investment in a particular economy. For instance, an aging population could imply low demand for diapers and strollers but higher demand for wheelchairs and walking sticks.