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The Macro Brief – The baby bust intensifies
22 Plays1 year ago
James Pomeroy, Global Economist, looks at how declining birth rates around the world are creating tough challenges for governments and economies.
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Transcript
Podcast Introduction
00:00:00
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
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This podcast was recorded on the 8th of February 2024 by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
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And don't forget that you can follow this weekly podcast on Apple and Spotify, or wherever you get your podcasts, by searching for The Macro Brief.
Impact of Demographics on Global Economy
00:00:42
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Hello and welcome to the Macrobrief.
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I'm P.S.
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Butler in London.
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On this week's podcast, we're looking at a long-term theme with big implications for the global economy – demographics.
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Global birth rates are falling quickly.
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In fact, the latest data suggests the world's population could start shrinking within the next 20 years, far sooner than many analysts once expected.
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And this spells tough challenges for governments and economies.
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To talk more about this, I'm joined in the studio by global economist James Pomeroy.
00:01:11
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James, welcome to the podcast.
00:01:12
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Thank you for having me.
00:01:13
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So, James, we've talked about this before.
00:01:15
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And in fact, there is a tendency when you raise the subject of demographics for people's eyes to almost glaze over to think it's a long time in the future, kind of interesting, but doesn't affect me.
00:01:27
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And the point you have made in your research is it's actually much closer to impacting our lives than we'd like to think.
00:01:35
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And in fact, since you published your report back in 2022, the data has continued to deteriorate.
00:01:41
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So maybe firstly, remind us what are the key metrics and how they changed in the last 12 months?
00:01:46
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Well, firstly, you're right, people do sort of glaze over because they think this is something that's only matters 20 years in the future.
00:01:51
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And the important thing with demographics is it doesn't matter 20 years in the future.
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It matters every single year between now and 20 years in the future.
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And that's the bit I think people often
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and sort of don't quite understand that these big changes we're seeing in the world's population, both in size and shape, are having huge implications for the economy today.
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They'll have huge implications tomorrow, the day after and the day after.
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And that's why we care so much about it.
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And when we look at the metrics for the world's population, the most important driver of that is birth rates.
00:02:20
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By some stretch is the most important driver, not just of demographics data, but probably of underlying potential growth in most countries.
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And those birth rate numbers have really been moving lower for some time.
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But since the pandemic, we've seen this huge leg lower in pretty much every economy in the world of birth rates dropping by three or four percent a year in some places, much more than that for a sustained period.
00:02:41
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And that's where these concerns start to come around, because you're now talking about birth rates that are much, much lower than anyone was expecting.
00:02:48
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And that has huge implications for the economy.
00:02:50
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So I was looking at some of your charts.
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In fact, I was at a dinner party where I was kind of quoting this stat.
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I said, do you realize that, in fact, in China, the population is actually contracting?
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I mean, that's a pretty amazing stat.
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It is.
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And it's not just China where this is happening.
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You've had this huge drop in birth rates in China, the birth rate in terms of
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children per woman is very, very close to one.
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And to put that in context, what that means, this isn't just a population that started shrinking.
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This means that if nothing changes over the course of a generation, the population would halve.
Effects of Declining Populations
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Because on average, you would talk about a replacement rate of children per woman of about 2.1.
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So we're less than half of that in China at the moment.
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So this is incredibly concerning.
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So it's not just about the population falling today.
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It's about where it could go in the future.
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But the most striking example for me globally is South Korea.
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where the birth rate has just kept falling and falling and falling, and is now down at levels of around 0.7 children per woman.
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So this is not a population that's going to halve in a generation, it's falling by two-thirds in a generation.
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Hugely problematic.
00:03:51
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And the question we're asking, I guess, in this report, and we've been asking more recently, is are these numbers sort of where the rest of the world is heading, closer to one?
00:03:59
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And if you get in that direction, then this has profound implications in other markets which currently aren't facing shrinking populations.
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And I guess a very topical subject is real estate, real estate in China.
00:04:09
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I mean, that population effect could have a big impact.
00:04:11
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Of course, if you start to see some of the drop in populations, it can have a bit of an impact on what's happening to property prices because you've got less demand for those houses further down the line.
00:04:21
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But it's ironic and in some ways that it's the lack of availability of housing that's causing this drop in birth rates to begin with.
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So there's a bit of a chicken and egg situation, I think, here between demographics and property markets.
00:04:33
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Before we come back to that point about the causes behind this declining birth rate, maybe just to focus on Europe, what's the situation there?
00:04:41
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Well the numbers we've had in some of the major economies in Europe aren't great.
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Germany's had a pretty substantial demographic challenge for some time and if you look at the data we get for Germany every month on the number of births, those numbers are down sort of 5 or 6% over the last year, that's pretty substantial.
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And in other European countries we're seeing things that in some places are slightly better, some places slightly worse.
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But generally, we're seeing this big drop off in birth rates.
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And I think that's a big concern in Europe where demographics we know are a big challenge.
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And you're starting to see these birth rates move lower from about 1.5 children per woman down towards a 1.2, 1.3.
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And then you start getting into that sort of closer to one range if these numbers keep moving lower.
00:05:21
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So you made some reference to it earlier in our conversation.
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But can we just go into some of the reasons behind that declining birth rate?
00:05:29
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So I think there's sort of three main reasons, the first of which, let's start with the sort of social side of things.
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And some of this is people simply choosing not to have children.
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Some of that is because of changes in their own lifestyles that the pandemic may have brought about.
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And so actually, I do quite like travelling.
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I quite like having a certain quality of life and therefore I don't actually want children anymore.
00:05:47
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And there seems to be a bit of a social change in that.
00:05:50
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Some things attached to that appear to be related to concerns about the world they'd be raising children into.
00:05:55
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Either they're concerned about making climate change even worse or raising people into a world where, let's be honest, might not be a great place to be alive in 50, 60, 70 years' time.
00:06:05
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And that, I think, is playing a big role.
00:06:07
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It pops up a lot in a lot of surveys, basically that social attitude towards having children.
00:06:11
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Then you've also had this change that's been a more structural story that was a big part of this over the course of the last 20 or 30 years, which is a higher female participation rate in the labour force.
00:06:21
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Now, that's clearly a very, very good thing, but it's brought with it essentially a bit of a delay in the timing at which people are choosing to have families.
00:06:28
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And so you start running into some other sort of issues in terms of the almost possibility of having larger families.
00:06:34
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You add on top of that, and this is the thing I think has really changed since the pandemic, is the economic reality of this.
00:06:41
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And if you're the average person in your 20s, in almost any developed economy, particularly in cities, the ability to afford a home in which you feel like you could raise a family is very, very difficult for a lot of people.
00:06:54
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And that difficulty to get on the property ladder is basically delaying people in when they're starting to have a family because people want a bit of stability before they bring children into the world.
00:07:02
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They want to know where they can go to school.
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They want to know that they're not having to move them every six months or nine months or a year if they get kicked out of their rental property.
00:07:08
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And even if you're not concerned about that side of things, rent's very expensive as well.
00:07:12
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And so high rents, you can't, it's not easy for a lot of people to suddenly say, well, actually, I've got a one bedroom apartment.
00:07:18
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I'm going to get a two bed or a three bed.
00:07:20
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People just can't afford it.
00:07:21
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And on top of that, you've got this additional challenge around cost of childcare, cost of living more broadly, that seem to have really, really squeezed a younger generation.
00:07:29
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And I think that is really fundamental to why this is happening.
00:07:32
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And you combine those two things together, some of the social things and the economic reasons, and essentially this is making people have kids much later in life.
00:07:38
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And when you start getting...
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a situation where people are starting to have families in their 30s, it brings another variable into play, which is biology.
00:07:46
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And this is a genuine risk that we see more and more people across the world who are unable to have as many children as they might want or simply can only, due to those limitations, have one or two children rather than three or four, like they may have done historically.
Environmental and Economic Implications of Population Decline
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And on top of that, you've got a growing prevalence of low sperm counts or infertility in people due to dietary change, due to pollution, these sorts of things.
00:08:09
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and fertility treatments just aren't readily available enough or cheaply available enough for a lot of people.
00:08:13
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So it's almost those two driving this third one, which is probably making things even worse.
00:08:18
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What about the argument from an environmental perspective that you could argue that it's actually a good thing that population is going to decline in the world, given the strain that the world's current population is putting on the world's limited resources?
00:08:32
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On a global basis, 100% yes.
00:08:34
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I think there's a lot of good things that are coming from this, that it may mean that we get a slower population growth rate in the coming years or a shrinking population that does take away some of our sort of impact on our planet.
00:08:45
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It also makes a difference locally.
00:08:47
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Not having rapidly growing populations might make it easier to get homes, might make it easier to...
00:08:52
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provide public transportation, these sorts of things.
00:08:55
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So there's positives to not having a fast-growing population.
00:08:58
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But the challenge is that this is happening at almost the worst time imaginable for a lot of governments, particularly in Western economies, who are saddled with a huge amount of debt coming out of the pandemic and a rapidly ageing population.
00:09:10
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In most developed economies, you're talking about the number of people of pensionable age rising by 2% or 3% a year.
00:09:16
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Now, that's a huge fiscal expense for governments in terms of pensions, health care and everything else that comes with it.
00:09:22
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And so that combination of that basically larger bill to pay, coupled with fewer people in your economy, is where this becomes a challenge.
00:09:30
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So there's a positive story out of this entirely, but there's also a big negative and a big challenge here.
00:09:36
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And the big negative for me is sadly the reasons that this low birth rate is happening is also a very sad story, right?
00:09:41
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There's a generation largely being left behind.
00:09:44
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So what can governments do or need to do?
00:09:48
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And I guess this is particularly relevant in a year where there's going to be a lot of elections.
00:09:53
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Do we sense that some policies are going to be mentioned in the electioneering?
00:09:56
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Well, there's a few ways you can try and do it.
00:09:58
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You can try and incentivise people to have more children.
00:10:01
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And governments across the world have tried this in a number of different ways, either with financial support directly for people having children.
00:10:07
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children or trying to think about subsidies for housing or for education or these sorts of things.
00:10:12
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And historically, they've not been overly successful.
00:10:15
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They may have stopped the rot in terms of this drop in fertility rates.
00:10:18
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We haven't necessarily seen any examples of a big turnaround in birth rates.
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as a result.
00:10:23
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So a great example is in Poland, where there's very, very substantial financial support for having additional children.
00:10:29
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But those numbers just aren't high enough.
00:10:30
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It's not enough to get to change the mass for a lot of people and birth rates continue to fall.
00:10:35
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We're seeing policymakers in Japan and Korea try a similar thing.
00:10:38
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So it's a big challenge.
00:10:39
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But either way, governments, I think, will have to provide more to cut down the cost of raising children in developed economies.
00:10:45
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But on top of that, you've got to think about the fiscal side of things.
00:10:48
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And this is where an election year becomes quite interesting because we know that you've got to raise more taxes or you've got to essentially make that elderly population slightly more manageable from a fiscal perspective.
00:10:58
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And what does that do?
00:10:59
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Well, you need to then either raise taxes, raise retirement ages or cut the quality of services.
00:11:05
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And none of those things are going to win you an election.
00:11:07
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And that's a huge challenge because these are the policy changes that structurally have to happen and governments will avoid them.
00:11:12
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We have another year of kicking the can down the road.
00:11:15
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And it means when these changes come at some point, because they have to, they have to be sort of a much greater shock to the system.
00:11:20
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And of course, it will be hugely unpopular.
Corporate Interest in Demographic Trends
00:11:22
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So you market extensively in the UK and elsewhere in Europe and across the world.
00:11:27
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You meet a lot of corporates.
00:11:29
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Are you still glazing over when you come onto the subject of demographics or do you sense it's a bit more of an interest and an awareness that perhaps you need to start thinking about it in your strategic planning?
00:11:38
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I think people are really starting to take it seriously because of a lot of the headlines that are coming out.
00:11:42
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And it does help people like me going out and talking to people about this.
00:11:45
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When you see these big headlines, births drop by this, China's population starts shrinking and people suddenly start thinking serious about the implications of it.
00:11:52
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So we are getting a little bit more interest.
00:11:54
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People always love hearing about it.
00:11:55
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People love their discussions around the topic.
00:11:57
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But it's just that how do I play it?
00:11:59
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How do I invest on the back of it?
00:12:00
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How does it matter for my business that some companies and some investors are struggling with still?
00:12:05
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And that's hopefully where we can help them out.
00:12:07
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James, thank you very much for joining us today.
00:12:09
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My pleasure.
00:12:09
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Thank you very much.
Conclusion and Future Insights
00:12:14
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Let's wrap things up with a look at some of the other key news from global research this week.
00:12:18
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It's been a tricky start to 2024 for emerging market currencies.
00:12:22
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Our FX teams say the backdrop is dominated by two forces.
00:12:25
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the path and speed for rate cuts by the Fed, and the outlook for China's economy and the renminbi.
00:12:32
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Their report looks at which currencies are most insulated from these factors and outlines our views across Asia LATAM and CIMIA FX.
00:12:40
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Elsewhere, economist Jamie Cunningham's new report examines how Australia is well-placed to become a key green hydrogen supplier.
00:12:48
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Many of their natural resources are readily available in the country, and investment in hydrogen has picked up.
00:12:54
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Despite some key challenges, Australia is forecasted to be the world's largest exporter of green hydrogen by 2050.
00:13:01
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And don't forget, our next Live Insights event is coming up on the 27th of February, where you'll have a chance to ask your questions to our trade economist, Shanela Rajanagam.
00:13:10
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For details on how to register or more information about anything we've talked about on the podcast, please email askresearch at hsbc.com.
00:13:20
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That's askresearch at hsbc.com.
00:13:26
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So that's it for this edition of the Macrobrief.
00:13:28
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Thanks very much for listening, and we'll be back next week.
00:13:37
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Thank you for joining us at HSBC Global Viewpoint.
00:13:40
Speaker
We hope you enjoyed the discussion.
00:13:43
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