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The business shock wave hidden in plain sight

The phrase “demography is destiny” is a much over used aphorism, but it is and will be central to future business strategy. Those arguing that demography is destiny have tended to be rather pessimistic. The American biologist, Paul Ehlrich, became famous for his controversial 1968 book, The Population Bomb, which asserted that the world faced mass starvation. The fact that Ehrlich cried wolf should not delude us to the gravity of the demographic threat now faced by the world’s leading economies. But to be clear, this is not a problem of too many people and too few resources. Rather it is a problem of too many elderly and too few workers. In other words, it is a working age population problem (WAP – the 15-64 age group). And we can predict the size of the problem with certainty, because the WAP in the 2020s and into the 2030s, has already been born. In absolute terms China, the world’s most populous country at present, also has the biggest working age population problem, with a projected decline of 400 million people by 2050

The tables below show the demographic shock wave[1] that is or is about to hit the leading economies. What they show is that the demographic shock to potential output growth will intensify in the 2020s and 2030s. The demographic support to economic growth is being undermined savagely in economies such as Italy and Japan. Even for those economies such as the US and the UK, where WAP growth is expected to continue, there is a very marked projected slowdown. The turning points in the tables and chart below are striking and a brutal wake-up call. Moreover, for all too many of the world’s leading economies the demographic situation goes from bad to worse between the 2020s and the 2030s.

Working Age Population – Past, present & future

Working Age Population: past, present & future

Companies focussed on the nature of the post-pandemic recovery, the enduring legacy of Covid-19 and the digital business revolution already underway, risk missing a seismic shock of enormous magnitude, namely the transformation in working age populations, which has implications for both the demand (consumers) and supply (employees) side of the economy.

Working age population growth in the UK slows from 8.7 percent in the 2000s, to 1.9 percent in the 2010s and 1.3 percent in the 2020s. And this may prove unrealistically optimistic to the extent that the 800,000 employees who left the UK during the pandemic fail to return.

Prior to the pandemic, the Boston Consulting Group (BCG) modelled 25 major economies in order to quantify the extent of labour shortages and surpluses comparing 2020 with 2030. They concluded that, “… in 2020, many countries would still be experiencing a surplus. By 2030, however, this surplus will have turned into a massive shortfall”.

In another pre-pandemic paper, the European Central Bank (ECB) concluded that, “the adverse trends are expected to turn even more adversely over the coming decade”. It goes on to say that, “times will get particularly difficult after 2020 as working age population will continue declining”. The depth of the problem demography creates is shown in the ECB’s assertion that “the EU’s productivity growth would have to double in order to keep the EU economy growing at the same pace as it did before the [financial] crisis started”.

However, the dire projections hide an even more ugly truth, namely that they are potentially based on unrealistic optimistic assumptions regarding net migration. The table below shows the degree of contraction in working age population projections, in the absence of inward migration, across so many of the world’s leading economies. The question that needs to be asked is, in a post-Covid-19, more protectionist, world economy, with many supply chains shortened, will labour migration flows be maintained at the level of previous decades? [1] Based on UN 2017 population projections.

Working age population change in the absence of migration

The final and widely recognised demographic challenge is the ageing of the population shown in the table below. The old age dependency ratio is based on UN projections of the ratio of the 65 plus to the 15 to 64-year-old population, per 100 of population.

Old Age Dependency Ratio % (ratio of 65+ to 15-64 population, per 100 of population)

The figures are breath-taking. In Germany the old age dependency ratio rises from 24 in 2000, to 32 in 2015, 45 in 2030 and 51 in 2035. In Italy the ratio rises from 27 in 2000 to 35 in 2015, 48 in 2030 and 56 in 2035. In Japan it rises even higher, from 24.9 in 2000 to 43 in 2015, 53 in 2030 and 57 in 2035.

Even in those countries with less adverse ageing demographics the shift is still enormous. In the UK for example, the old age dependency ratio rises from 24 in 2000, to 28 in 2015, 36 in 2030 and 39 in 2035.

John Weeks, Distinguished Professor Emeritus and Director of the International Population Centre at San Diego State University, has said that: “demography shapes what the options for the future will be”. Companies need to take heed of this advice when formulating strategy. Understanding the direct impact of demography on customers and employees will be foundational to business success but is all too easily forgotten in the noise surrounding the pandemic and technological disruption. The numbers are there for all to see, but are they forgotten? Don’t make that mistake.

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