As the world shakes off Covid-19, a bigger economic threat looms

While economic disruption from the Covid-19 pandemic is expected to be temporary, demographics present a more enduring challenge, a new report from Moody’s Investors Service says.

The rating agency said that while a short-term economic bump is expected as rising vaccination rates enable a return to normal life, sparking a post-pandemic increase in consumption, the global economy will face pressure from an aging population that will slow workforce growth and weigh on economic output.

Moody’s noted that the latest U.S. census data said the country’s population growth has slumped to its lowest level since the Great Depression over the past 10 years.

“Unlike the slow population growth in the 1930s, which was preceded and followed by a population boom, the slowdown this time is part of a longer-term global trend (excluding a handful of African countries) driven by aging, lower fertility rates and declining immigration,” it said.

Advanced economies, led by Europe and North America, will face slowing growth in their working populations. A number of countries — including Germany, Japan, Italy, Spain and South Korea — face the prospect of their working-age populations declining in the years ahead, the report said.

While immigration has been a major driver of population growth in advanced economies in recent years, this looks unlikely to continue in the years ahead, as current immigration rates will not offset slowing growth.

“Immigration has declined in a number of countries over the last few years, including the U.S., and political polarization poses future risks for immigration policy,” it said.

At the same time, a number of emerging economies are facing their own demographic challenges.

“Russia, Thailand, Chile and China have rapidly aging populations. Even relatively younger countries such as Brazil and Turkey are aging quickly,” the report said.

Overall, Moody’s forecasts that global working-age population growth “will slow by more than half over the next two decades.” This will, in turn, “lead to significantly lower global growth over the next decade.”

Specifically, it estimated that global aging will likely reduce economic growth by as much as 0.9 percentage points per year between 2020 and 2025.

Moreover, this aging follows “years of slowing productivity growth and rising debt levels that the pandemic exacerbated,” the report said.

“Aging will further increase fiscal burdens as health care and social security spending rise,” it noted.

Possible offsets to these trends include more women joining the workforce, delayed retirement, and innovation.

“Higher female labour force participation not only mitigates demographic headwinds, but also supports public finances by widening the tax base and easing future pressure on social welfare,” the report said.

At the same time, technology innovation can also “mitigate and even reverse the negative credit implications of aging populations” by boosting worker productivity, the report said.

While some have speculated that the increased reliance on technology due to the pandemic may provide a strong boost to future productivity growth, Moody’s said it’s not yet clear that this will materialize.

“Adopting advanced technologies at scale will require many other changes, including public and private investment in human capital and education, comprehensive labour retraining and re-skilling and policies prioritizing human capital development,” it said.