Why an aging population will pressure global economic growth

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Demographics contribute to global risk

While borrowers dread rising interest rates, they’re good news for savers—particularly pensioners who need income for old age. A number of key economies currently face aging demographics. Aging demographics pressure economic growth, as there are more dependents than productive human resources in the economy.

aging demographics

Aging demographics directly affect public finance

An economy with aging demographics faces significant pressure on its growth prospects, government finances, and political stability. This is happening in many developed economies currently. This aging demographic pressure most affects economies in Europe and Latin America that have expensive welfare programs. The equation is simple. The higher the number of pensioners as a percent of the population, the higher the payout from public finances.

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The financial implication of an aging population lies in a narrower tax base coupled with rising costs for pensions and healthcare for elderly people. This leads to a squeeze on government budgets. So, public finance, which could have otherwise targeted productive avenues, diverts to unproductive pension commitments by the governments of these countries.

Rating and investment impact

In order to cushion the increasing pressure on public finances, economies tend to borrow. But this is even more detrimental to economic growth in the long run. Higher sovereign debt levels may lead to poorer country credit ratings by international credit agencies such as Standard & Poor’s (MHFI) and Moody’s (MCO).

A lower credit rating adversely impacts a country’s borrowing power. In March, Brazil’s credit rating was downgraded by Standard & Poor’s from BBB to BBB- on account of the country’s sluggish economy and climbing debt levels. This downgrade sent the iShares MSCI Brazil Capped ETF (EWZ) to record lows. EWZ measures broad-based equity market performance in Brazil and has holdings in top companies including ItauUnibanco Holding S.A (ITUB), Ambev SA (ABEV), and PetroleoBrasileiro SA Petrobras (PBR). The fund declined as much as 66% from May 2008 to February 2009.

The case of Japan

The risk of aging demographics heightens in the case of Japan on account of its sheer scale of debt. Japan had a sovereign debt pile of more than $11 trillion in 2013—greater than what’s held by all Eurozone economies. Japan currently faces a government debt-to-gross domestic product (or GDP) ratio of 227.2%, according to Japan’s Ministry of Finance.

A Japanese sovereign debt crisis would dwarf the 2009 Eurozone debt crisis by all estimates.

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