The Secular Headwind of Global Demographics

November 01, 2017
By Patrick V. Masso, CFA

It is impossible to overstate the extent to which changes in demographics impact long-term economic growth and financial asset returns.

Visualize global demographic changes like the glaciers – slow moving, mostly hidden beneath the surface and significantly impacting anything in its path. Glaciers played a direct role in sinking the Titanic in April 1912. On the positive side, archaeologically-speaking, glaciers facilitated the migration of humans and animals.

In terms of economics, demographics are of utmost importance. One way to estimate potential economic growth is to add together the growth in population and the growth in productivity. In other words, how many more people does an economy have and how much more productive can this pool of workers be? The chart on the right uses this framework to show the impact of an aging economy in the US.

Population growth in the US has slowed over the last several decades and now sits at a paltry 0.4% per year. In relative terms, it could be worse. In Europe (especially Italy) or Japan, you will find negative population growth. There are only two ways I know how to grow a country’s population: the “natural” way (which we won’t get into) and a net inflow of immigrants from other countries.

If populations around the globe are not growing as in the past and, in some cases, are outright declining, can the existing workforce at least be more productive?

To be more productive, workers typically need physical capital like computers, tools, factories, and manufacturing equipment. A main reason why the post-2008 economic recovery has been so shallow compared to prior recoveries is the lack of capital investment by businesses. It is no surprise that, correspondingly, productivity growth has been sub-1% (grey bar below).

These trends likely foreshadow below average, albeit positive, long-term total returns across all asset classes. Executing short-term tactical adjustments within a diversified portfolio following a long-term strategic asset allocation will be more important. Our managed portfolios are dynamically positioned in this very way to confront an environment of low population and productivity growth.

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