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The Global Demographic Headwind



July 28, 2010 – Comments (6)

I came across a fascinating article written by PIMCO's Bill Gross this morning.  The main thesis of the piece is that slowing global population growth is going to act as a significant economic headwind in the coming years.  It's a great read and an inspiration for everyone to go out there and make some babies :).  I kid.  At the very least, the United States should seriously consider loosening its immigration policies in an effort to snag productive people from other countries, emphasis on productive.  Food for thought. Enjoy.

Privates Eye

Bill Gross | August 2010

"...That return journey will be all the more difficult to accomplish, however, because of demographics, an influence that much like gravity is hard to see but whose effect is all too powerful. Demographics – or in this case population growth – is so long term in its influence that economists and observers are inclined to explain the functioning of economic society without ever factoring in the essential part that it plays in growth. Production depends upon people, not only in the actual process, but because of the final demand that justifies its existence. The more and more consumers, the more and more need for things to be produced. I will go so far as to say that not only growth but capitalism itself may be in part dependent on a growing population. Our modern era of capitalism over the past several centuries has never known a period of time in which population declined or grew less than 1% a year. Currently, the globe is adding over 77 million people a year at a pace of 1.15% annually, but slowing. Still, that’s 77 million more mouths to feed, 77 million more pairs of shoes to make, 77 million more little economic units of demand – houses, furniture, cars, roads, oil – more, more, more...

The lack of population growth was likely a significant factor in the leveraging of the developed world’s financial systems and the ballooning of total government and private debt as a percentage of GDP from 150% to over 300% in the United States, for example. Lacking an accelerating population base, all developed countries promoted the financing of more and more consumption per capita in order to maintain existing GDP growth rates. Finally, in the U.S., with consumption at 70% of GDP and a household sector deeply in debt, there was nowhere to go but down. Similar conditions exist in most developed economies.


The danger today, as opposed to prior deleveraging cycles, is that the deleveraging is being attempted into the headwinds of a structural demographic downwave as opposed to a decade of substantial population growth. Japan is the modern-day example of what deleveraging in the face of a slowing and now negatively growing population can do. Prior deleveraging periods such as what the U.S. and European economies experienced in the 1930s exhibited a similar demographic with the lowest levels of fertility in the 20th century and extremely low population growth. Things did not go well then. Today’s developed economies almost assuredly offer substantially less population growth than the 1.5% rate experienced over the prior 50 years. Even when viewed from a total global economy perspective, population growth over the next 10–20 years will barely exceed 1%.



The preceding analysis does not even begin to discuss the aging of this slower-growing population base itself. Japan, Germany, Italy and of course the United States, with its boomers moving toward their 60s, are getting older year after year. Even China with their previous one baby policy faces a similar demographic. And while older people spend a larger percentage of their income – that is, they save less and eventually dissave – the fact is that they spend far fewer dollars per capita than their younger counterparts. No new homes, fewer vacations, less emphasis on conspicuous consumption and no new cars every few years. Healthcare is their primary concern. These aging trends present a one-two negative punch to our New Normal thesis over the next 5–10 years: fewer new consumers in terms of total population, and a growing number of older ones who don’t spend as much money. The combined effect will slow economic growth more than otherwise."





6 Comments – Post Your Own

#1) On July 28, 2010 at 5:43 PM, Dobbes (< 20) wrote:

It's a natural effect of modernization.  I remember reading studies in my Sociology class back in undergrad that charted GDP and birth rates.  As a country develops, birth rates drop off.

Now, with more countries developing than ever, birth rates are diving faster than ever.  

Expanding population bases would mean even base products like agricultural would be able to gain a tailwind.  Remember 2007 when everyone was piling into MOO, POT, and MONS on that thesis?  So much for that.

I don't think a contracting population base is necessarily a bad thing.  Though it hurts economic growth, it does allow for greater resource conservation and growth.

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#2) On July 28, 2010 at 6:01 PM, SkepticalOx (98.36) wrote:


The fact that most developed countries are "welfare states" with massive social programs, however, causes a problem when it comes to a declining birthrate no? Lesser young people to support all the entitlements to the older retirees?

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#3) On July 28, 2010 at 6:37 PM, MegaEurope (< 20) wrote:

The kneejerk reaction that population growth is good for investment returns may not be true.

I don't think the examples given of population based deleveraging are very good at all.  In my opinion other factors predominated in the Japanese slump and certainly in the Great Depression.

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#4) On July 28, 2010 at 9:31 PM, TDRH (96.66) wrote:

One key factor to consider is "Acceptable Risk" for the investment community.   Consider a recent college graduate, student debt, car loan, home load, day care or child support, when will this individual realize the surplus necessary to invest?  

As the investment community ages on average, and the economy is struggling to create opportunities for new wealth creation, where do the investment strategy trends lead.   The answer is value, and income.   Currently boring 2-3 percent dividend yields while waiting for the "potential" upside.  Personally I anticipate an overall aversion to risk. 


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#5) On July 29, 2010 at 3:45 AM, ralphmachio (< 20) wrote:

Well, without so much as reading past the first couple of lines, if population growth is good for the economy, the economy itself must then be bad.  Not exactly news to me. 

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#6) On July 29, 2010 at 12:43 PM, leohaas (30.08) wrote:

Sure, population growth world-wide is slowing. But that in and of itself does not mean some kind of financial headwind.

In business, you would never worry about the world population. You would only worry about the Total Addressable Market (TAM). For almost all businesses, the TAM is not the whole world, but rather some small subset. That subset may actually grow a lot faster than the world population. For instance, a company like MSFT may not have considered China as part of its TAM, say in 1990. No doubt, that has completely changed. This is due to a changed political climate and increased wealth in China.

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