Not black and white

Demographic doomsayers missing shades of grey

Summertime and the worrying is easy. A simplistic spreadsheet easily portrays current demographic trends as a threat to prosperity. Moody's is the latest to offer gloomy predictions about rapidly ageing societies. Such doomsayers are too pessimistic.

The credit rating agency cites a Conference Board forecast of slowing economic output in 55 developed and developing countries. Between 1990 and 2005, average annual gross domestic growth (GDP) growth in the sample was 2.9 per cent. The business group reckons it will slip to two per cent from 2020 to 2025. Researchers at least note that the mechanical models, which basically extrapolate from the working-age population, miss the actual dynamics of labour markets.

In reality, working habits can and will change. There are still many women yet to join the paid workforce globally. Almost everywhere, the unemployed and underemployed are a significant human resource. Retirements are set to start later. Students may linger for less time outside the job market and more immigrants from less productive economies can be welcomed into richer lands.

Lower national savings rates are another concern at Moody's, as more old people use their nest eggs and fewer middle-aged people build them. Textbooks say less savings lead to lower investment and slower growth. In practice, investments depend relatively little on money socked away. The capital put to work by companies almost all comes out of retained profit, while governments can fund infrastructure projects with tax revenue.

Besides, as population growth slows, so does the amount of investment required to sustain a particular standard of living. As the number of people in a given area increases, more houses, cars and roads are needed. When the number is steady or declining, it takes less investment, less GDP and much less GDP growth to achieve the same lifestyle.

Rather than worry about the wealth effect of growing older, Moody's should be concerned with the debt effect. Even if GDP increases per person stay the same, slower population growth begets slower expansion of finished goods and services. That means less money will be available to cover borrowings. Worse, recent history suggests that ageing economies tend to come with low inflation rates. Now that sounds like serious financial trouble.