Demographics, growth and happiness

Demographics, growth and happiness

I hope you may be able to join me later this week, on Wednesday, 26 April, at 13:00 BST, for our spring economics webinar. In this session, I will assess the outlook for activity, inflation and interest rates and discuss how businesses can navigate the challenges ahead. To register please go to: https://deloitte.zoom.us/webinar/register/WN_UWI8VQo7SGSPt9b_mEGzJg

• The world is two-thirds of the way through a population boom that started in the early 19th century. It is estimated that the world’s population was about five million in 10,000 BC and about 300 million by the birth of Christ. It took almost 2,000 years, until the early 19th century, to reach one billion. Since then growth has been explosive, doubling in the hundred years to 1920, to reach two billion and rising fourfold to eight billion today. The United Nations' Population Division estimates that the world population will reach ten billion by 2050 and 10.4 billion by the end of this century.

• Beneath these numbers lies a different story, of slowing population growth, falling fertility and an ageing population.

• Annual global population growth peaked in 1963 at 2.3% since then it has been on a downward trajectory. In 2020, population growth fell below 1.0% for the first time since 1950. Economic and social development, and greater prosperity, have contributed to a sharp decline in female fertility rates, with a global average of five births per woman in the 1950s falling to 2.3 today. While birth rates have fallen, longevity has grown, rising by nine years, to almost 73, since 1990. Rapid economic growth in lower and middle-income countries is likely to drive further rises in longevity, adding to the ageing of the world’s population.

• Many countries will see their populations shrink this century. Two-thirds of the world’s population live in countries or areas where fertility is below 2.1 births per woman, which is roughly the level required for populations with low mortality to stabilize in the long run. The populations of China, Japan, Russia, Germany, Italy and many other European countries are forecast to decline over the next three decades.

• Growth in the world's population is coming almost entirely from emerging economies, particularly Africa, India and Pakistan. Northern America, Australia and New Zealand are forecast to buck the demographic trend in much of the developed world, with relatively high rates of immigration helping to expand their populations.

• Governments and policymakers have long worried about the effects of declining populations. For much of the modern period this has been about the ability to wage war and, to some extent, cultural influence. In the 19th and first half of the 20th century, France and Germany needed to maintain ever larger armies to counter the threat posed by the other and, in France’s case, to undertake imperial expansion. Both saw an expanding and youthful population as vital to their security. For similar reasons, totalitarian states from Stalinist Russia to fascist Italy and Ceausescu’s Romania have operated pro-natalist policies, designed to incentivise and sometimes compel women to have more children.

• Demographics also have powerful economic implications. Growth in the working population leads to increased GDP growth, the most high-profile gauge of economic vitality. Faster economic activity bolsters government revenues and its ability to spend and invest. Every extra person in work lifts GDP by an amount that should be roughly equivalent to their earnings. An expanding workforce increases the ratio of taxpayers to economically inactive people, such as the retired, strengthening the public finances. Some argue that a youthful workforce is likely to be more adaptable, innovative and risk-loving than an older workforce, thus contributing to more rapid growth.

• Countries can seek to counter the economic effects of a shrinking domestic workforce by increasing immigration, encouraging family formation through incentives and support programmes and helping people to return to the workforce or to work longer hours. Different countries have different approaches that are far more influenced by historical, social and cultural factors than economic ones.

• Many countries would baulk at explicitly pro-natalist policies, as practised by authoritarian and totalitarian states, though most western countries offer some degree of support for child-related costs. Countries have differing approaches to migration, with the US, for instance, relatively open to immigration and Japan historically highly restrictive. Expanding the workforce by getting more women and older, unemployed or disabled people ought to the swiftest solution. On the face of it doing so ought to be easier in countries, such as Italy or Greece, with low rates of workforce participation than in, say Switzerland and Norway, where participation is more than a third higher. Yet cultural and social factors play a major role and public opinion may be resistant (consider, for instance, the bruising battle President Macron has faced to raise the pension age from 62 to 64 in 2028, several years behind current retirement age in most other G7 nations, let alone planned retirement ages).

• The economic effects of slowing workforce growth can be seen across much of the world. In the UK growth in the workforce has slowed from around 2.0% a year in the 1950s and 1960s to less than 1.0% in the last 15 years. Slower workforce growth has contributed to a halving of the UK’s trend rate of growth, to around 1.3% a year.

• Since GDP growth is the sum of workforce growth and productivity growth, the obvious solution to negative demographic trends is to raise productivity. Governments have been trying to do just that forever and, at least in the west, with less and less success. If it were easy, they would already have done it. Hoping for an acceleration in productivity to counter the impact of an ageing population isn’t a policy.

• Whatever success governments have in expanding their workforces and raising productivity it is unlikely to wholly offset the impact of shrinking populations. There will also be a need to adapt to ageing and possibly shrinking populations. That means everything from keeping people healthier in old age, to encouraging lifelong learning, adapting housing and infrastructure for an older population and ensuring pension provision is sustainable.  

• We conclude with an obvious, but often forgotten, truth. GDP growth is the most important measure of economic performance, but it is not necessarily synonymous with welfare gains or human happiness.

• High incomes help, but other factors, such as social support, levels of trust in a society and freedom play a major role in determining human welfare. Some relatively rich nations, including Saudi Arabia, Kuwait and Singapore, rank well down the World Happiness Reports league table. Conversely Costa Rica and New Zealand, for instance, rank above Germany and the US in the happiness league despite having significantly lower levels of GDP per head.

• The Nobel prize-winning economists, Angus Deaton and Daniel Kahneman, found that happiness rises markedly as GDP per head rises from subsistence to middle-income levels but thereafter the relationship weakens and, above roughly $60,000 per head, happiness is uncorrelated with income.

• This insight suggests that, at least for relatively rich countries, slower growth associated with ageing population will have less impact on happiness than at an earlier stage in development when incomes were so much lower. Moreover, many of the factors that determine human welfare, such as strong social and civic networks, are only loosely related to GDP growth. Ageing societies will need to nurture these welfare drivers as growth becomes scarcer.

• What is clear is that the world is ageing. We must make the most of it.

For the latest charts and data on health and economics, visit our Economics Monitor:
https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.5% at 7,914. The FTSE100 has risen almost 8% from the lows seen in the middle of March during a period of stress for US regional banks

 Economics

• Early estimates of activity in April from surveys of purchasing managers suggest a pronounced acceleration in service sector activity in the UK, euro area and US, and a further decline in manufacturing activity in the UK and euro area. US manufacturing returned to growth  
• The Deloitte CFO Survey showed a strong rebound in business confidence and a sharp decline in perceptions of external financial and economic uncertainty
• UK consumer confidence rose to its highest level since the invasion of Ukraine but remains well below average levels 
• UK consumer prices rose by a greater than expected 10.1% in the year to March, down from 10.4% the previous month. Food price inflation hit 19.1%. UK inflation has remained stubbornly high even as US and euro area inflation rates ease
• UK job vacancies fell and the number of people looking for work rose signalling a cooling labour market
• UK average weekly earnings grew by 5.9%, well below the rate of inflation
• UK retail sales volumes fell by 0.9% in March perhaps in part due to the weather – the month saw the sixth-highest rainfall of any March since 1836
• In a sign of concern about the effects of a potential economic rift between the US and China, US Treasury secretary Janet Yellen said that: “We do not seek to decouple our economy from China’s. A full separation of our economies would be disastrous for both countries”
• Relatively strong UK inflation and labour market data strengthen the case for a further rate rises when the Bank of England meets next month
• China posted better than expected growth of 4.5% in the first quarter of 2023 compared with the same quarter last year confirming the post-lockdown acceleration in the Chinese economy. Commodities prices rallied on the news
• Investors are shifting aggressively into short-term US Treasury bills to protect themselves against the risk of a sell-off in US government bonds in the event of a failure to raise the debt ceiling. The spread between one-month and three-month US treasuries – a gauge of relative demand for one-month treasuries – has risen to record levels
• US banks are seeing significant outflows of deposits as savers search for higher returns
• US median house prices have fallen by 9.2% from last June’s high
• Earnings reports so far from US regional banks show a sharp drop in their margins in the wake of failure of Silicon Valley Bank. Funding costs are rising as banks increasingly compete for deposits
• Following a mild winter EU gas storage was at 56% of capacity in early April, around 20 percentage points higher than typically seen at this time of year

 Business

• US broadcaster Fox News paid $788m to settle a defamation case brought by Dominion, a manufacturer of voting machines. Fox had broadcast accusations that Dominion had rigged the machines in favour of Joe Biden
• The holders of $4.5bn in Credit Suisse bonds that were wiped out when Credit Suisse was merged with UBS are suing the Swiss financial regulator
• SpaceX’s Starship, the most powerful rocket ever built, exploded around four minutes after launch. Such an outcome is not unusual for a first test
• Businesses are concerned that their insurance policies will not pay out following a state-backed cyberattack, the FT reports. Insurance typically does not cover damages from war
• The UK government warned businesses of the risk of cyber-attacks from groups linked to Russia
• UK pension funds have criticised proposals that may see them being encouraged to invest in riskier assets to boost economic growth, saying their primary responsibility is to safeguard their members’ assets
• Royal Mail and union leaders agreed on a deal that included a 10% pay rise over three years, a lump-sum payment and commitments on jobs and conditions. Union members will now vote on the deal
• Chilean president Gabriel Boric said that he would nationalise the country’s lithium industry. Demand for lithium has soared alongside rising battery production
• The EU agreed a €43bn plan that aims to boost EU production of semiconductor chips from 10% to 20% of the global total

 Global and political developments

• Chinese foreign minister Qin Gang said that: “Those who play with fire on Taiwan will eventually get themselves burned”
• The EU said that it was preparing compensation for farmers and introducing restrictions on imports of Ukrainian grain. Ukrainian grain that would ordinarily be exported through Black Sea ports is now reaching EU markets, lowering prices for EU farmers
• Broadcasters in Denmark, Sweden, Finland and Norway published an investigation claiming that Russian ships are mapping undersea cables and wind farms for possible sabotage
• UK deputy prime minister Dominic Raab resigned after an independent report upheld allegations of bullying
• US president Joe Biden is reportedly set to announce he will run for re-election this week

 And finally… the EU is cracking down on fake honey imported from a number of countries including China. Half of the honey sold in the trading bloc is not compliant with EU rules – honey-laundering