Global economic growth slowed by seismic population changes, China hit hardest

June 5, 2017

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An aging work force and decelerating population growth could plunge the world's economic potential 20 percent over the next several decades, according to a new study from the Berkeley Forum on Aging and the Global Economy (BerkeleyAGE). 

The study, Population Aging and the Global Economy: Weakening Demographic Tailwinds Reduce Economic Growth, predicts high-income European and Asian nations with populations aging the fastest will face more severe economic impacts, while the United States, benefiting from somewhat higher birth rates and immigration, will fare somewhat better. Middle- and low-income nations will continue to benefit from strong growth among their younger populations, but the change will be somewhat less potent as population growth slows.

"Global demography is moving from a long period of rapid growth at working ages to a new era of slower labor force growth and unprecedented aging, with widespread implications for economies around the world," according to Ronald Lee, lead researcher for the BerkeleyAGE project and a UC Berkeley professor of the graduate school in economics and demography.

BerkeleyAGE, a new initiative at UC Berkeley, forecasts the economic implications of global population trends in order to help corporations, governments, nonprofits, industry groups, and the media understand and navigate challenges in a new era of unprecedented population aging.

China stands out as a major exception as compared to other developing countries. Due in part to China's one-child policy, the country’s working age population began to shrink in 2016. In fact, the study projects that the Chinese economy in 2040 will be 41 percent smaller than if recent demographic trends continued.

"Demographics will not be even-handed in the next several decades," said David Baxter, executive advisor at BerkeleyAGE and CEO of Baxter Consulting Group. "A new economic balance may emerge between labor-abundant developing nations and capital-abundant developed nations, and population aging will likely cause many governments and businesses to rethink how to sustain growth in the years ahead."

Previous research estimating the effects of aging on global economic growth has been limited. This is the first study that has used the National Transfer Accounts (NTA) database to model and project national economic growth for so many countries, and to aggregate the results into a regional and global analysis. The study is based on estimates of labor income, consumption, asset income and private savings by age found in the NTA data.

Responding to seismic demographic changes

Between 2015 and 2040, the 65+ population will increase five times faster than the working age population (age 20-64), according to statistics from the United Nations. As populations grow older, more people enter retirement and reduce their economic output. But older adults also hold more assets than their younger counterparts, increasing capital available to spur future economic growth.

Demographic forces drove 48 percent of global economic growth from 1990 to 2015, according to BerkeleyAGE research, which predicts these forces will weaken by 69 percent, reducing future global economic potential by 20 percent.

"Population aging is projected to be one of the most transformative trends in the 21st century," said William Dow, BerkeleyAGE Director and a UC Berkeley School of Public Health professor of health economics. "Our focus at BerkeleyAGE is understanding and predicting the economic risks and opportunities created by this unprecedented phenomenon."

While forecasting economic risks, the study cites economic, social, and government policy responses that can mitigate the imminent impacts of emerging population trends.

"Slowing demographic tailwinds could be mitigated by policies that raise employment rates, investing in education in order to maximize future productivity, and preparing for pension, health care and long term care challenges," according to Dow. "Business and industry leaders can prepare by developing new workforce, capital risk and market strategies, as well as new products and services for an aging marketplace."

Impacts differ by country

High-income nations were the first to experience falling birth rates, and therefore are the first to see the economic benefits of population tailwinds dissipate. In high-income nations overall, the researchers report that falling birth rates and aging are projected to reduce the working-age populations by 4 percent from 2015-2040 while the number over 65 is projected to grow by 61 percent.

Among high-income nations, these demographic shifts will weaken effects on economic growth from a 1 percent annual tailwind (1990-2015) to 0.2 percent (2015-2040), according to the study. The United States will see a population-related increase in national income drop from 1.3 percent a year (1990-2015) to 0.6 percent (2015-2040).

Middle- and low-income nations (excluding China) will see their working age populations increase 42 percent over the next 25 years, but this is still a slowdown compared to past growth rates. Among these regions, the component of economic growth linked to population will weaken from a 2.1 percent annual economic tailwind (1990-2015) to 1.3 percent (2015-2040).

A major exception: The changing population demographics in China predict a 0.6 percent headwind that will slow national income growth through 2040, compared to the 1.5 percent tailwind from which the nation benefited in the past 25 years.