On ageing, migration and growth

On ageing, migration and growth

Earlier this year, the UK’s Office for National Statistics (ONS) updated its estimates for UK population growth. The ONS expects the UK’s population to rise from 67.6m in 2022 to 72.5m by 2032. The increase comes entirely from net migration, while the natural change, the difference between births and deaths, is thought likely to be flat.

• These are estimates, based on current and past trends, not forecasts, but they illustrate an important trend, underway since the late 1990s of migration driving population growth. In the 30 years to 2000, the UK’s population increased by about 5%. If the ONS estimates prove correct, the UK’s population will increase by 23% between 2000 and 2032.

• Many migrants arrive to work and their earnings boost GDP growth and government receipts, helping counter the negative economic effects of an ageing population and a rising old-age dependency ratio (the ratio of retired people to the working population).

• Migration is not the only way a country can help offset the effects of an older population. Extending working lives, raising workforce participation rates or increasing family size have similar economic effects, but tend to be politically and socially controversial.

• Raising retirement age tends to provoke opposition, as was seen in France in 2023 when a plan to raise the retirement age by two years triggered widespread strikes and riots. In recent decades, a growing number of countries have introduced explicitly pro-natalist policies, designed, through welfare payments and tax breaks, to boost fertility. The evidence on the effects of such policies is mixed. Most studies suggest that even expensive programmes deliver modest increases in birth rates. There is evidence too that such schemes have a greater effect on the timing of births – enabling women to have children earlier – than on the total number of children born in the long term.

• Migration arguably offers a surer, more immediate way of bolstering the economy in the face of an ageing population. Most western economies have gone down the route of increased migration in recent years in part, at least, for such reasons.

• While migration helps, it is unlikely to alter the direction of demographic change. Commenting on the ONS population estimates, Madeleine Sumption, the director of the Migration Observatory at the University of Oxford, said, “It's actually interesting how little [impact] immigration has… on things like the old-age dependency ratio… you'd expect it to be bigger, but ultimately immigration doesn't change the age composition that much” (BBC Radio 4, 28 January 2025). This is partly because migrants age and, in time, adopt the family size of existing residents.

• Ms Sumption cited a Canadian study that showed even if Canada doubled its population, its age dependency rate would continue to rise. In a similar vein, the Nordic think tank Nordregio estimated in 2016 that with a population of 5.2m Norway would require net migration of over 40m by 2080 to maintain its old-age dependency rate.

• Short of a dramatic shift in birth rates, not much is likely to alter the direction of demographic change or its impact on growth rates. Migration is not a panacea, but it is, along with increasing retirement ages, reducing unemployment and inactivity and raising productivity, one of a number of policies that can help. (On the economic impact of migration it’s worth noting, as Ms Sumption pointed out in her BBC interview, that it is not just a question of levels of migration. Higher-paid migrants contribute disproportionately in economic terms.)

• Japan is leading the world in terms of dealing with the effects of an ageing population. Its population has fallen from a peak of 128.1m in 2010 to 123.6m today. Since 2000, Japan’s old-age dependency rate has deteriorated faster than elsewhere and to levels that are significantly higher than in any industrial nation. Japan is an unusual test case – a country that is seeking to cope with an ageing, shrinking population without embracing the relatively high levels of migration from North America and western Europe. (Japan’s net migration has run at an average of around 186,000 a year in the last decade. Relative to population, this is about one-third of the rate in the UK.)

• A shrinking and ageing population means that Japan now has one of the slowest growth rates in the western world. In the last 14 years, the Japanese economy has grown by an average of 0.9% a year, almost half the European average and one-third the rate seen in the US, Australia and Canada where migration has been especially strong. Less restrictive immigration policies would undoubtedly have delivered faster Japanese GDP growth.

• While Japan has been cautious in using migration to offset the economic effects of an ageing population, it has successfully used other levers. Japan has boosted the workforce by delaying retirement, raising female employment rates and reducing inactivity and unemployment. Having had an unusually low workforce participation rate in the 1990s, Japan today has one of the highest rates among industrialised countries, even higher than Norway or Sweden.

• Japan’s growth rate has been paltry, but measured by growth in living standards, Japan has done well during a period of shrinking population. Decent productivity growth and getting more people into work have supported output. As a result, GDP per capita has grown faster in Japan since 2010 than in the UK, Canada, France or Spain. These higher migration countries have enjoyed superior headline GDP growth, but slower growth in their standard of living.

• There are no easy solutions to countering the economic impact of an ageing population. Migration is one response, and it provides a quick boost to GDP growth. Japan’s experience shows that there are others approaches – particularly if the focus is on supporting standards of living, rather than GDP growth.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.4% at 8,732. 

Economics

• The gold price hit a new record of $2,942.70 per ounce last week boosted by trade and wider geopolitical uncertainties
• EU president Ursula von der Leyen said “unjustified tariffs… will trigger firm and proportionate countermeasures” in response to the US announcing 25% tariffs on all imports of steel and aluminium
• The UK said it would not immediately retaliate against US steel and aluminium tariffs and may seek exemptions due to low export volumes and its steel being used in the US defence industry
• US consumer price inflation unexpectedly increased to 3% in the year to January, up from 2.9% increasing investor expectations that the Federal Reserve will cut interest rates only once this year
• UK GDP unexpectedly grew by 0.1% in the final quarter last year, resulting in GDP growth of 0.9% in 2024. However, GDP on a per capita basis fell 0.1% last year
• The National Audit Office reported that UK businesses face a “significant cost burden” to comply with UK tax legislation, with HM Revenue and Customs’s estimate of £15.4bn per year likely to be an understatement
• The UK’s House of Commons Public Accounts Committee said that HMRC’s tax evasion estimates, amounting to £5.5bn in the 2022-23 tax year, are “likely being vastly underestimated”
• Annuity sales in the UK rose to a ten-year high of £7bn in 2024, according to the Association of British Insurers, amid higher rates and global economic uncertainty
• UK university applications for engineering and technology courses rose notably this academic year, according to the Universities and Colleges Admissions Service, while nursing and teaching applications were at the lowest since 2019
• The number of UK first-time house buyers increased by 20% in 2024 and represented a record 54% share of all property sales requiring a mortgage, according to Halifax. The average age of a first-time buyer was 33, the highest in the past 20 years
• Euro area GDP increased by 0.1% in the final quarter of last year, up from no growth in the previous quarter, resulting in GDP growth of 0.7% throughout 2024

Business

• Heathrow Airport confirmed multi-billion plans to expand two of its terminals, following recent announcements to build a third runway within the next ten years
• US aerospace manufacturer Boeing delivered more jets than its European rival Airbus in January for the first time since March 2023, as it begins to recover from recent strikes and supply chain issues
• French president Emmanuel Macron announced AI investments worth £109bn, while urging more European investment in the AI industry currently dominated by the US and China 
• Following a fall in underlying profit to its lowest level since 2020, energy company BP said it would “fundamentally reset” its strategy to boost returns
• Troubled UK utility company Thames Water is appealing to the Competition and Markets Authority regarding Ofwat’s decision to limit future price increases it can charge to customers to 35% between 2025–30, less than the 53% initially sought 
• NHS chief executive Amanda Pritchard said that the UK’s health service should consider “private capital investment” to restore buildings and technology needed to deliver long-term improvement

Global and political developments

• Mr Trump announced that the US and Russia were to immediately start negotiations to end the war in Ukraine. Ukrainian president Volodymyr Zelenskyy said that Ukraine would not accept any bilateral negotiations without his country’s involvement
• Russia’s military spending in 2024 was $462bn, surpassing the $457bn combined total of European defence budgets, according to the International Institute for Strategic Studies think-tank 
• Mr Macron described Mr Trump’s return to the US presidency as an “electroshock” that could spark EU investment to bolster its security and economy
• Mr Trump signed an executive order to pause the Foreign Corrupt Practices Act, which forbids US organisations from bribing foreign officials to win business, to “further American economic and national security”
• US Navy Admiral Samuel Paparo said that China’s military exercises around Taiwan could soon become a “fig leaf” to hide an attack on the island
• The UK and US refrained from signing an international agreement at the AI Action summit in Paris, with the UK government citing concerns over the declaration’s clarity on global governance and national security
• UK business secretary Jonathan Reynolds said the Competition and Markets Authority should be less risk averse and more agile, amid the government providing the regulator with an updated mandate that focuses more on growth 

And finally… in the UK a man who accidentally threw out a hard drive containing thousands of Bitcoin, now worth a reported £600m, is considering purchasing the soon-to-close council refuse tip, where he believes it is located, to continue the search – where there’s muck there’s brass