News ID: 170675
Published: 1117 GMT October 21, 2016

How devastating the world's aging population could be for global economy

How devastating the world's aging population could be for global economy

The global productivity slowdown is going to intensify in the coming years as the working age population across the world declines, and the number of people past retirement age continues to grow, according to research from economists at Morgan Stanley.

They say that "the negative effect that an aging workforce has on productivity growth and thus economic growth is under appreciate."

In the bank's weekly Global Macro Briefing, subtitled 'Global Workforce is Aging, Can Productivity Provide an Offset?' — economists Chetan Aya, Elga Bartsch, and Jonathan Ashworth argue that while some have suggested that strengthening productivity could help offset the impact of an aging global population, this will most likely not be the case, Business Insider wrote.

As a result, global economic growth as a whole could struggle. Here is an excerpt from Morgan Stanley's analysis:

"With weakening demographic trends, productivity growth will take on a more important role in driving overall GDP growth outcomes. The problem though is that productivity growth has already been weak and an aging workforce will have a negative effect on such growth."

Aya, Bartsch, and Ashworth continued, Estimates for the US suggest that a 10 percent increase in the fraction of the population aged 60+ decreases the growth rate of GDP per capita by 5.5 percent while in the euro area, an increase in the ratio of older workers aged 55+ by one-percentage point will reduce the growth rate of labor productivity by between 0.2 and 0.6-percentage points per annum."

"The key reason why we have paid intense attention to the role of demographics in the current economic cycle is that global demographic trends have just passed an inflection point. Since 2011, the global age dependency ratio (the ratio of non-working age population to working age population) has begun to rise after a 45-year period of improvement. Growth in the global working age population has slowed to an estimated 1.0 percent in 2016,as compared to an average of 1.6 percent in the past 20 years. Based on United Nations projections, global working age population growth will decelerate further. To put this in perspective, these demographic headwinds will impact countries that account for 64 percent of the world’s GDP in PPP terms and 78 percent in nominal GDP terms."

Morgan Stanley's global research falls into line with an analysis undertaken by the International Monetary fund over the summer, which argued that Europe's aging population is going to cause a sharp productivity slowdown and cause serious economic problems.

Europe's already aging population is about to swell as workers reach retirement age, which in turn will cause a substantial drop in productivity, IMF staff members Shekhar Aiyar, Christian Ebeke, and Xiaobo Shao, wrote.

European productivity is already poor by historical standards, particularly in states like Italy and Greece, where rock-bottom productivity has previously caused significant economic issues. In fact in Italy, weak productivity growth is one of the biggest factors in the country's stagnant economy.

So what can be done to try and offset the economic impacts of an unproductive, aging workforce globally? Morgan Stanley's economists have three suggestions — governments should spend more on research and development activities, adopt new technologies quicker, and implement policies that encourage citizens to retrain in new jobs.

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