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Life expectancy is rising and birth rates are falling across the globe. In many developed markets (DMs), that means the working-age population is set to shrink over the next 20 years. See the chart. That has vast macro implications.
Fewer workers means slower growth. It is also inflationary, in our view. Retirees stop producing economic output, but do not typically spend less, historical data show. Plus, governments are likely to spend more on healthcare and pensions. The resulting inflationary pressure is one reason why we expect central bank policy rates to stay above pre-pandemic levels.
Aging-related spending also threatens to push up government debt, with global public debt having already tripled since the mid-1970s, to 92% of global GDP in 2022. And that debt is likely to be subject to higher interest costs. The economic picture looks quite different in emerging markets (EMs), like India, where the working-age population is still growing.
We think the broad growth impact of diverging population trends is well understood by markets. Yet as we outline in our new research paper, countries can respond differently – creating an uncertain outlook. We believe this will affect asset prices as markets adjust to how countries adapt.
Within EMs, we seek those more likely to capitalize on their demographic advantage by bringing more working-age people into the workforce or that look to ramp up investment in productive capital, like public infrastructure. Growing populations consume more energy, so we expect rising spending on energy infrastructure in places like India and Indonesia. We think higher returns are likely in EMs with stronger growth and greater investment demand.
In DMs, we look for those that could better adapt and outperform the growth outlook markets have priced. DMs can mitigate the hit to growth by finding more workers – from other countries, or among women and other groups underrepresented in the workforce. Japan has somewhat lessened the impact of aging by substantially raising female participation. The recent immigration surge in the U.S., U.K., and Canada is boosting their workforces, as reflected in the recent bumper U.S. jobs report, but it would have to persist for years to fully offset working-age population declines – unlikely, in our view. We’re monitoring how much artificial intelligence (AI) can boost the productivity of a smaller workforce.
Even less understood by markets, we believe, is the sectoral impact of mega forces – or big structural shifts driving returns.
Older populations spend differently than younger ones. For example, healthcare spending rises with age. Real estate demand could change since older people typically move less frequently. Yet research shows even predictable spending shifts are not priced in until they hit. That was true for healthcare in Japan, where valuations have risen broadly in lockstep with the well-signposted growth of the country’s retired population. That appears true now in the U.S. and Europe – one reason we like healthcare in both regions. We also think AI names will benefit from investment in automation to boost worker productivity.
In EM, we favor countries best able to capitalize on their demographic advantage. We prefer DMs whose responses to aging could be underappreciated. We target sectors and firms poised to benefit from new spending patterns.
Jean Boivin is Managing Director, Head of the BlackRock Investment Institute at BlackRock Inc.
Wei Li is Global Chief Investment Strategist, Blackrock Investment Institute at BlackRock Inc.
Nicholas Fawcett, Macro Research – BlackRock Investment Institute, and Filip Nikolic, Macro Research – BlackRock Investment Institute, contributed to this article.
Disclaimer
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
© 2024 BlackRock Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. This article first appeared April 8, 2024, on the BlackRock website. Used with permission.
Image: iStock.com/alex57111
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