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We’re not getting any younger. As the global population ages, particularly in China and developed economies such as Japan and Germany, we can expect big changes in economic growth, government policies and investment behavior. The working-age population is already falling in Japan, moving from slow growth to gradual decline in Europe, and expected to stop growing in about 2020 in China. That hurts economic growth, since GDP is simply a function of output per worker, i.e. labor productivity, multiplied by the number of workers.
To offset this drag on growth, governments may raise the retirement age, encourage more women to enter and remain in the workforce, and allow more immigration. Another possibility is more capital-intensive production to cope with increased consumer demand as those entering retirement switch from being net savers to net spenders. In the US, growth in health expenditure has far outpaced GDP growth since the 1970s. US public health spending reached 7.6% of GDP in 2010, and is forecast to reach 12.7% of GDP by 2030 as the population ages. The worldwide aging trend, coupled with higher government pension costs, will put significant pressure on public finances that are already facing demands for austerity. Therefore, governments will either have to take tough measures, such as increasing the retirement age, or face the consequences of deteriorating fiscal budgets.
Demographics and equities valuation
For investors, this implies a shift toward safer asset classes that provide a more stable income. Healthcare might provide an attractive investment opportunity as demand rises. The chart compares the price-earnings ratio of the S&P 500 index of US equities with the ratio of ‘fortysomethings’ to ‘sixtysomethings’ in the US. The estimated future reduction in the ratio of ‘fortysomethings’ to ‘sixtysomethings’ implies a lower price-to-earnings index ratio, which would be negative for equities in the long run.