Demographics and Destiny

  • Economy
  • Michael Gayed

“It is not in the stars to hold our destiny but in ourselves.” – William Shakespeare

Can you imagine a world in which population growth is flat? How about negative?

Fifty years ago such questions would have been dismissed as absurd. At the time, global population growth was increasing at a rate of 2.1% per year. Today, with that growth rate down to 1.1%, the concept seems less ridiculous but still hard to fathom.

Global Polulation and growth rate form 1951 to 2016 graph1

Source: United Nations Population Division

If projections are correct, however, by 2050 population growth will move all the way down to 0.6%.

Global Population and growth rate projections from 2020 to 2050 graph2

In 2050, there will likely be many, many countries with negative population growth rates. How can we forecast such a thing?

Because it is already happening. In 77 countries, the fertility rate (average number of children born to a woman over her lifetime) has fallen below 2.0, the level necessary to sustain population levels.

Of the 25 most populous nations, Japan, Germany, and Russia already have shrinking populations. Italy and France would by negative as well but not for immigration.

Population growth rate in 2016 graph3

Where is the growth coming from? The emerging world in Africa, Latin America, Asia, and the Middle East. Europe is not far from shrinking as a continent and without immigration would already be there.

Population growth rate by region graph4

The economic, political, and social ramifications of a rapidly shrinking global population are many. Too many to delve into in just one post.

But as economic output (GDP) is dependent in part on population growth, we should probably be expecting lower growth rates in the years to come. We are already seeing this in the U.S. and globally.

Annualized real GDP of US expansions graph5

Unless productivity shows a significant increase, the output will slow. Does that mean that the world is going to end? No, I don’t believe so but it will mean that expectations will have to be reset lower. The hopes and dreams of getting back to 4% GDP growth may not be achievable for the time being. That would be acceptable, though, as long as the standard of living continued to increase.

The problem is that the last 20 years in the U.S. has seen slower growth and a declining standard of living (as measured by median real household income). That’s a toxic combination with no simple solutions. It is also the proximate cause for much of the dissatisfaction we have in the U.S. in spite of all-time highs in stock prices and seven years of economic expansion.

In Europe and Japan, one “solution” to slower growth has been negative interest rates. You’ll notice in the table below that every country with a negative interest rate has a fertility rate below replacement levels. This is hardly a coincidence.

2 year yield and fertility rate chart6

Will negative interest rates solve their growth problems? Not unless it can magically lead to higher fertility or productivity. There is scant evidence of that happening and some speculation that it may have the opposite effect. I say speculation because we are in uncharted territory here. No one truly knows.

Historical Context

For thousands and thousands of years, population growth advanced at a snail’s pace (roughly 0.07% per year). The industrial and scientific revolutions changed that with a bang. Global population first hit 1 billion in 1804 and today stands at over 7 billion.

Population in billions chart7

Source: Wikipedia, United Nations Population Division

That increase is over 13x as fast as the previous 6000 years.

Change in global population by century graph8

When viewed in that context, perhaps a decline in growth was inevitable and not entirely a bad thing. Perhaps there needs to be a period of digestion where humans can figure out how to best utilize the existing resources of this planet or invent new technologies. Perhaps a growth rate of over 2% as we saw in 1966 was unsustainable and will be viewed a thousand years from now as a historical outlier.

I don’t know the answer and I’m not sure there is one. When it comes to demographics, we are left with more questions than answers.

  • Who will be the winners and losers in the next 50 years? How do you define “winner” and “loser”?
  • Will negative population growth rates in developed nations lead to more or less stability in the world?
  • Will all growth rates eventually move toward 0% as the dividing line between “developing” and “emerging” becomes a thing of the past?
  • How will societies adapt to a rapidly aging population? What new technologies will make this transition easier?
  • Is there such a thing as an optimal level of population growth? Does the answer vary for each country based on land mass and economic/social needs?
  • How much should the government be attempting to influence demographics through policy? Is it ethically and/or morally acceptable to encourage or discourage reproduction?
  • What events/policies/cultural changes would reverse the trend of declining population growth? How likely are they to happen in the next 50 years?

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Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.

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