However, as we found out in our new paper – Emerging market demographics – implications for patterns of growth, interest rates and inflation – the economic effects of demography are far from preordained . What’s more, it all depends on which EMs you’re talking about.
Crowded world
The world is set to become more crowded. The United Nations’ central case projection is for the global population to rise by almost 2 billion people, to 9.7 billion, by 2050. The world could be home to close to 11 billion by the end of this century.
It will come as little surprise that EMs will be responsible for almost all of this increase.
Location, location, location
That said, there will be big differences between EMs. African countries are expected to account for most of the increase within EMs – with Nigeria alone expected to see its population swell by more than 500 million by the end of the century. Meanwhile, China’s ageing population could fall by some 375 million.
China is an extreme example – a by-product of its ‘one child’ policy – but it’s the case that most large emerging markets are set to age notably and face a slowdown in the growth of their working-age populations (often defined as those aged 15 to 64).
Here are some of our key findings:
- The quality of workers matters more than the number of ‘working-age’ people. Negative effects from ageing populations are likely to be mitigated by rising labour force participation amongst older workers. Moreover, quality can offset quantity – there remains considerable scope for improving education levels and worker skills to help offset slower growth in worker numbers. Only in advanced Asian economies and Eastern Europe will the impact from the ageing population likely weigh conclusively on economic growth.
- Demographics are an important building block of EM growth prospects, but they are certainly not ‘destiny’. Weaker capital deepening – the amount of machinery and equipment per worker – and weaker productivity growth account for a larger share of the deceleration in most countries’ potential growth, than demographics. So demographics is just one consideration for the long-term economic outlook.
- China and India will increasingly dominate the EM landscape in 2050, while Indonesia and Nigeria will move most notably up the ranks, breaking into the top five-largest EMs list. Only China is likely to catch up with the US economy in absolute terms, eclipsing the US around 2033.
- The changing composition of EM growth is even more striking than the headlines, with the rise of the middle classes set to become a dominant force shaping global trends. By 2050 China’s consumer market could be 20% larger than that of the US, while spending on healthcare could rise by a factor of four.
What are the investment implications?
Demographics are an important building block of EMs’ long-term economic outlook, driving corporate earnings and equity markets. But the implications of demographic change go beyond economic growth.
Interest rates
Ageing populations may be associated with slower growth, but they are also responsible for falling savings. These factors work in opposing directions on interest rates, making the impact on underlying real equilibrium interest rates – the natural level of rates – somewhat ambiguous.
It’s not clear, as it is sometimes asserted, that ageing economies will face higher interest rates. We find that, while the long-term downward trend of equilibrium rates may become more modest and less broad-based over the next five years, demographics will still weigh on interest rates.
Since debt interest rates determine the price of a spectrum of other assets as well, lower rates will raise the value of future cash flows – likely supporting asset prices more broadly.
Inflation
Emerging economies’ integration into the global financial and trading system continues to shape the investment landscape. We find that, even though globalisation has slowed over the past decade, global factors have still exerted downward pressure on interest rates and average inflation.
Investors needn’t worry about demographics driving inflation higher. Demographic change may put upward pressure on prices as populations age, but it is a modest, slow-moving force.
Persistent inflationary pressures are only likely if not tackled by policymakers, suggesting investors should be more focused on the strength of institutions, such as central banks, than with counting who has the most grey hairs.
Healthcare
With the extension of average lifespans and growing economies, health expenditure has grown in developing countries. For example, in many EMs it has risen by some 1%-2% over the past 10 years, as a proportion of gross domestic product (GDP) – and this is before ageing really sets in.
Many EMs plan to build health infrastructure and widen health coverage to safeguard against pressures from ageing populations. As diets and lifestyles change, ailments common in the developed world – diabetes, heart disease, strokes – will, unfortunately, become more prevalent.
The changing composition of activity will present investment opportunities, but investing in healthcare can be challenging.
Indeed, healthcare used to be considered a boring defensive play, but this has changed in recent years. Corporate consolidation and spinoffs have become common. Service and insurance providers co-exist with drug- and device-manufacturers, as well as innovative therapies.
In a world of low growth, large amounts of capital chase promising new technologies. Biotechnology and life sciences are investment opportunities as likely to be found in venture capital and private equity portfolios as they are in blue chip ones. Firm performance can vary widely.
The future of healthcare is closely tied with changing demographic profiles. These profiles vary widely across the EM landscape. Navigating this complex and changing world will require insight and agility on a case-by-case basis.