A New ‘New Normal’ Economic Growth and Population Age

Posted By on Nov 8, 2013|0 comments

The population of children dwindled and the population of retirees was low. This led to a strong economic growth pattern in the past, suggests authors Robert Arnott and Denis Chaves, in “A ‘New Normal’ In Demography and Economic Growth,” Journal of indexes, September/October 2013.

The workforce included a predominance of young adults driving their skills and increasing productivity. Consequently, the world and specifically the U.S. enjoyed faster economic growth.

Was this normal? Far from it.

The increased number of retirees could zero out or cause growth to go negative. While the size of the slow down is questionable, the direction is not. The biggest risk is expecting for similar historic growth, when demographics do not support such expansion.  Human behavior conditions us to believe that what we experienced in the past is normal; however, we should not expect this.

For each increase in the percentage of the population 65 and older, Arnott and Chaves concluded that real GDP per capital (RPC GDP) would decline 0.3%.

They also believe that growth in GDP continues to happen through the age of 35 before it begins to slow down. However, when studied more closely, the rate of growth actually begins slowing down in a person’s late 20s.  This is not to imply that individual’s income does not grow, just that their impact to the economy diminishes.

One of the benefits of the 1950s-1980s was that the population saw an increase in the number of 25 to 35-year-olds, contributing one percent to GDP growth.  However, the number of people in this age group seems to be diminishing while the group of those 65 years and older continues to increase.

The percentage of working individuals between 20 and 64 years of age is expected to decline in the next 40 years. Canada can expect to see a decrease from 63 to 53%, Japan with a 59 to 46% drop and Germany falling from 61 to 50%. Baby boomers born right after 1945 are reaching retirement now, putting greater pressure on those working to grow the economy.

The authors conclude by stating that the world and the U.S. have enjoyed better than normal growth. Investors must account for this or be whipsawed by not being ready.

One assumption unobserved by the authors, which is worth paying attention to, is that with a greater service-based economy, the age of working individuals could rise well above 65. This could help stave off the downward pull to per capital GDP growth.

Investors cannot rely on growth forecasts based on the past. Expectations for market growth are not as robust and therefore we need to look to other investments for growth.

Submit a Comment

Your email address will not be published. Required fields are marked *

Answer the below so we know you\'re not spamming us. * Time limit is exhausted. Please reload CAPTCHA.