Why demographics make a nonsense of government economic policies

We’ve written a good deal about demographics in Moneyweek over the last few years. It seems to us that the ageing of our populations is good reason to think that we will see low growth for many many years to come.

You can read some of my past thoughts on it here. And if you can’t be bothered to do that you can watch me explaining it here. You might also let me know below if you want me to bother doing regular video blogs – if you do I’ll dig out the camera the office gave me last year. I suspect I can improve on the production quality in this one with very little effort.

The problem is that while I think the demographic argument makes sense, and so do a growing number of other people, governments around the world don’t appear to be prepared to accept that ageing populations make a nonsense of their economic policies and their forecasts.

Good news, then, that the Finnish central bank has made a statement that suggests they have a little more sense than most. According to Euroinvestor, in its “starkly worded” biannual economic outlook, it forecasts that GDP will fall by 0.8% this year and rise by a mere 0.7% next year. It also expects unemployment to hand around 8.5% and the public debt to GDP ratio to rise to 62% in 2015 (the EU limit is 60%). So far so normal.

But here’s the difference: instead of claiming that with the right policy mix and a little time chucked in all will revert to “normal”, Erkki Liikanen, the governor of the Bank of Finland, says something else, that the ageing of the Finnish population will create a “risk that Finland will drift onto a path of fading economic growth, persistently high unemployment and deteriorating public finances.”

There is more on how fast Finland is ageing here – note that over 18% of the population is already over 55.

But what would be really interesting would be if any other cental banks were to read Liikanen’s words properly – if they did, they might begin to understand at least in part why their extreme monetary policies aren’t working.

PS Thanks to Paul Hodges of International iChem for pointing this story out.