What Do Declining Birth Rates Mean for the Global Economy?

by
Tannia Pereira

The decline in birth rates across the world is a significant demographic shift and is now a focal point of discussion among economists due to its long-term impact on economic growth. This article aims to highlight the challenges and opportunities ahead caused by this demographic shift.

Currently, the replacement rate needed for a population to sustain itself over time is 2.1. As of 2021, the United States (1.66), the European Union (1.53), China (1.16), Japan (1.30), India (2.03), and S.Korea (0.81) have replacement rates below the desired level. Given that GDP growth is fundamentally driven by labor supply, capital investment, and productivity improvements, declining birth rates are likely to constrain long-term economic growth. A shrinking working-age population could hinder aggregate output and the production of goods and services. However, it is important to note that immigration dynamics can offset this trend. For example, while few people immigrate to China, the consistent flow of immigrants to the U.S. has helped in mitigating the effects of declining birth rates.

Labor market dynamics will be profoundly affected by the decreasing influx of young people and the retirements of an aging population. This demographic imbalance may exacerbate labor shortages, skills mismatches, and challenge the sustainability of social welfare programs. A scarcity of skilled labor may exert upward pressure on wages, prompting corporations to invest in productivity-enhancing technologies, such as artificial intelligence, robotics, and automation to maintain profitability. In conclusion, the decline in birth rates presents significant challenges for economies worldwide. Policymakers and business leaders must understand the macroeconomic impacts and innovate accordingly to sustain growth amidst these demographic changes. While demographic shifts will impact the global economy in the long term, we see near-term opportunities for corporations that are leaders and/or beneficiaries of productivity-enhancing investments, such as artificial intelligence. Investors focus on allocating strategic growth capital to regions with relatively higher replacement rates, such as India. Lastly, we see a secular investment opportunity in the healthcare sector, capitalizing on changing consumer spending patterns for products and services needed by an aging population.

Countries with fertility rates above or below replacement level, 2021
Data source: UN, World Population Prospects (2022)

DISCLOSURES

The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.

This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.

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