The demographic timebomb

Many forecasters rightly pointed out at the beginning of the financial crisis that the recovery would be very slow by historical standards as it would take years to work off the huge debt accumulated during the bubble.

Another future headwind for the world economy – one that will outlast the hangover from the credit crunch – is that populations are ageing.

This implies not only fewer workers producing less national income, but also heralds an era of increased volatility, says Andy Mukherjee on Breakingviews. The ratio of middle-aged people – 45- to 54-year-olds – to those in their 20s is rising worldwide, from 0.65 in 2010 to 0.85 in 2025.

The middle-aged save more, so as the ratio goes up, the economy’s ability to withstand deflationary shocks dwindles; more and more people will be saving rather than spending.

Moreover, young people’s spending normally spurs investment, soaking up the savings of the middle-aged. But as the young group shrinks, its spending potential becomes too small to encourage much investment.

So, savings chase a limited set of investment opportunities, implying more asset bubbles in future. Markets “are in for a rocky ride over the next two decades”.

Merryn

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