Population trends signal changes in economies and markets
Demographics are the hidden factor in long-term trends affecting capital markets and the economy. And they are highly predictable: today's 40-year-olds are next year's 41-year-olds, barring war, disease or other man-made or natural catastrophes.
Younger populations drive stronger GDP growth
The biggest jump in contributions to GDP growth occurs when non-working adolescents enter the workforce; another jump, often smaller, occurs as workers reach their 30s and peaks in their 40s. By the time workers hit their 50s, their contribution to GDP growth slips. Thus, we expect countries dominated by young adults, and where the young-adult population is growing quickly, to have the strongest per capita GDP growth. And those countries with aging populations, such as the United States and Japan, will experience slower economic growth.
But middle-aged adults influence capital markets
With regard to savings, however, young adults rarely are savers—rather they are net borrowers. Middle-aged adults drive capital market returns in terms of income, savings, and investments. Generally, they focus on stocks first and then bonds. As they retire, they tend to first sell off their equity holdings and then their bonds to finance their consumption needs. Thus, awareness of demographic trends around the world informs our view of how economies and capital markets will fare in future decades.
Mind the (Expectations) Gap
Slower growth stemming from an aging population is not a bad
thing. It still signifies a growing economy. The real danger is not recognizing
the change, resulting in a gap between expectations and reality. Thus, public policy will
be based on assumptions of previous growth levels when the population was
younger and growing more quickly. Instead, we need to scale down those higher
growth expectations to reasonable levels.