Influence of Asia’s demographic changes on the world’s markets
In the ten years ending in 2019, ten economies in Asia, the so-called A-10, made up 50% of incremental global GDP and 60% of incremental goods exports, and supplied USD 5 trillion in capital to the rest of the world. As half of these countries are aging rapidly, how will the global supply of labor and capital be affected?
Asia is home to nearly 60% of humanity and its economic rise in the last few decades has transformed the global economy. Asia has also proved to be the manufacturing hub of the world and a net supplier of savings that has supported consumption in the developed world.
With the dynamism of Asia, particularly China, having been so central to the wealth or profitability of the global economy, a key question going forward is what will be the implications of a significant aging and shrinking in the workforce within this engine of growth, both within the region and outside of it.
Demography is changing faster
It is normal for population growth to slow and average ages to rise as countries prosper. The demographic shift in the A-10, however, is faster than the economic transition.
- In the last few decades, A-10 economies have grown two to three times faster than the pace at which the EU/US grew at similar income levels, but the drop in their fertility levels has been five to seven times faster.
- Most of the A-10 economies have reached low fertility levels at much lower per capita income levels than in the EU/US.
- They are aging faster too: Whereas the average age in the EU/US rose from 30 to 40 over half a century, this occurred in just 17 years in South Korea and 22–24 years in Japan, China, and Thailand. Thailand and China have a higher median age and a lower wealth per capita than all of the countries outside Eastern Europe and they may grow old before they get wealthy.
- In Japan and South Korea, there is a steep decline in births as the number of women of child-bearing age is now falling.
- At this demographic stage, confidence weakens. Just 30% of Japanese respondents in our survey expect to be better off than their parents, versus 80% in other countries we surveyed (such as India or China).
Productivity matters over headcount
The anticipated drop in the working-age population in Asia not only has implications for Asia, but also the rest of the world. The A-10 economies made up more than half of incremental global working-age population in 2010, but will see a shrinking workforce by 2032.
However, a continuing shift away from agriculture can help release workers for industry and services. What is more, the quality of the workforce may matter more than its quantity. A-10 economies with low fertility rates have also seen the strongest increases in average height and years of schooling.
This means a longer working life (more educated people tend to retire at an older age), as well as higher productivity. Despite a growing preference for services employment, we find that the supply of industrial labor to global value chains from A-10 economies is less at risk than feared, at least over the coming decade.
Asia to continue providing capital
The A-10 economies are also a major provider of capital to the world, with USD 15 trillion in net international assets. Given that A-10 dependency ratios (the number of children and retired elders per 100 workers) are set to rise, many people fear a drop in their savings.
However, we think this is unlikely over the next decade for two key reasons:
- Due to insufficient pensions and public healthcare in most of the A-10 economies, households may continue to save for emergencies and retirement, as confirmed by our survey. Further, as people age, they become more cautious: Japan had the lowest percentage of respondents who thought their pensions were sufficient, despite Japan having the largest pension assets in the A-10.
- Rising dependency ratios mean weak real house prices (China, Japan, and South Korea are most at risk, in our view): Reducing real-estate investments would mean a shift toward financial assets. Most A-10 economies still need to increase their pension wealth, implying continued strong demand for what are traditionally regarded as safe assets.
For example, despite Japan’s workforce peaking in 1995, and its dependency ratio rising for the last three decades, its current account has remained in surplus. A major driver has been the highly resilient primary income channel (this includes income from investments in other countries). If not for primary income, the Japanese economy would have been running a persistent current account deficit. Thus, if a country has accumulated wealth before it grows old, the economy can better withstand the demographic transition.
Slower growth, lower real rates/inflation
We believe the future risks to A-10 growth are less related to labor supply, and more to sluggish growth in capital deployment, particularly in real-estate and infrastructure investments.
Further, in several of the A-10 economies, total factor productivity growth (or efficient use of labor and capital) has fallen in recent years, creating a headwind for global growth. However, there would be a meaningful deficit in A-10 labor supply only if Chinese productivity growth slows by four percentage points.
Separately, we do not see demography affecting inflation meaningfully, with the A-10 dependency ratio unlikely to rise in the next decade (we assume younger economies will increase their participation in global value chains). Combined with the continued demand for safe assets and anemic productivity growth, this would mean low interest rates again once the current macroeconomic volatility subsides. A sharp rise in the A-10 dependency ratio that could affect inflation is only likely to occur after 2035.
1 A-10 economies refer to China, India, Indonesia, Japan, Philippines, Vietnam, Thailand, South Korea, Malaysia, and Taiwan (Chinese Taipei).