Economists fear low birth rates in developed world will choke growth

Birth rates have been down in the developed world since the crippling 2008 financial crisis, further putting the brakes on global growth

PUBLISHED : Monday, 12 May, 2014, 10:31pm
UPDATED : Tuesday, 13 May, 2014, 3:31am

Nancy Strumwasser, a secondary school teacher from Mountain Lakes, New Jersey, always thought she'd have two children. But the lay-offs that swept over the US economy around the time her son was born six years ago helped change her mind. Though she and her husband, a market researcher, managed to keep their jobs, she fears they won't be so fortunate next time around.

"After we had a kid in 2009, I thought, 'This is not happening again', " said Strumwasser, 41. "I never really felt comfortable about jobs, how solid they can be."

The financial crisis that followed the collapse of US investment bank Lehman Brothers in 2008 did more than wipe out billions in wealth and millions of jobs. It also sent birth rates tumbling around the world as couples found themselves too short of money or too fearful about their finances to have children. Six years later, birth rates haven't bounced back.

For an overcrowded planet, this is good news. For the economy, not so good.

We tend to think economic growth comes from working harder and smarter. But economists attribute up to a third of it to more people joining the workforce each year than leaving it. The result is more producing, earning and spending.

Now this secret fuel of the economy, rarely missing and little noticed, is running out.

You’re going to create fewer jobs. ... wage growth will be slower

"For the first time since the second world war, we're no longer getting a tailwind," said Russ Koesterich, chief investment strategist at Blackrock, the world's largest money manager. "You're going to create fewer jobs. All else [being] equal, wage growth will be slower."

Births are falling in China, Japan, the United States, Germany, Italy and nearly all other European countries. Studies have shown that births drop when unemployment rises, such as during the Great Depression of the 1930s. Birth rates have fallen the most in some regions that were hardest hit by the financial crisis.

In the United States, three-quarters of people surveyed by Gallup last year said the main reason couples weren't having more children was a lack of money or fear of the economy.

The trend emerges as a key gauge of future economic health - the growth in the pool of potential workers, ages 20 to 64, is signalling trouble ahead. This labour pool had expanded for decades, thanks to the vast generation of baby boomers.

We have no plans for how to run a society without growth

Now the boomers are retiring, and there are barely enough new workers to replace them, let alone add to their numbers in any significant way.

Growth in the working-age population has halted in developed countries overall. Even in France and Britain, with relatively healthy birth rates, growth in the labour pool has slowed dramatically. In Japan, Germany and Italy, the labour pool is shrinking.

"It's like health - you don't realise it exists until you don't have it," says Alejandro Macarron Larumbe, managing director of Demographic Renaissance, a think tank in Madrid.

The drop in birth rates is rooted in the 1960s, when many women entered the workforce for the first time and couples decided to have smaller families. Births did begin rising in many countries in the new millennium. But then the financial crisis struck. Stock and home values plummeted, blowing a hole in household finances, and tens of millions of people lost jobs. Many couples delayed having children or decided to have none at all.

Couples in the world's five biggest developed economies -the United States, Japan, Germany, France and Britain - had 350,000 fewer babies in 2012 than in 2008, a drop of nearly 5 per cent.

The UN forecasts that women in those countries will have an average 1.7 children in their lifetimes. Demographers say the fertility rate needs to reach 2.1 just to replace deaths and keep populations constant. The effects on economies, personal wealth and living standards are far reaching:

1) A return to "normal" growth is unlikely: Economic growth of 3 per cent a year in developed countries, the average over four decades, had been considered a natural rate of expansion, sure to return once damage from the global downturn faded. But many economists say that pace can't be sustained without a surge of new workers.

2) Reduced pay and lifestyles: Slower economic growth will limit wage gains and make it difficult for middle-class families to raise their living standards, and for those in poverty to escape it.

One measure of living standards is already signalling trouble: Gross domestic product per capita - the value of goods and services a country produces per person - fell 1 per cent in the top five developed countries from 2008 through 2012, according to the World Bank.

3) A drag on household wealth: Slower economic growth means companies will generate lower profits, thereby weighing down stock prices. And the share of people in the population at the age when they tend to invest in stocks and homes is set to fall, too. All else being equal, that implies stagnant or lower values.

Births might pick up again, of course. In France, where the government provides big subsidies and tax breaks for children, birth rates are back where they were in the early 1970s. In other countries, women who put off having children in the recession might play catch-up soon, as they did after the second world war.

But even a recovery in the number of births to pre-recession levels will leave families much smaller than they were decades ago, a shift that has already affected industries and economies around the world.

In Japan, sales of adult diapers will exceed sales of baby diapers this year, according to Euromonitor International, a marketing research firm. In South Korea, where births have fallen 11 per cent in a decade, 121 primary schools had no new students last year, according to Yonhap, the country's government-backed news agency.

Park Hyun-kyung, a 34-year-old hospital administrator in Daegu, South Korea, said she would like to have three children, just like her parents. But she and her husband have decided to stick to one, if they have any.

"Most jobs are not secure enough to allow couples to have a baby and raise kids," she says.

In China, where the working-age population is set to shrink next year, the government is relaxing a policy that had limited many families to one child. It might not help much. Chinese are choosing to stick to one on their own.

Lei Qiang, a logistics manager in Shanghai with a two-year-old daughter, has ruled out another child. "I just couldn't think how expensive it is to have two," said Lei, 39.

Economists are worried not just because growth is stalling in working-age populations. Their numbers as a share of the total population in many countries is falling. Economists like to see this share of total population rise, because it means more people are earning money, expanding the tax base and paying for schools for the young and pensions and health care for the old.

Before the recession, the number of these potential workers as a proportion of total population was falling in three of the world's six biggest developed economies - Japan, Germany and Italy. Now the proportion is also dropping in the United States, France and Britain, according to investment firm Research Affiliates, using data obtained from the UN.

Economists say it is rare for the number of working-age people as a share of the total population to fall in so many major countries at the same time. The six countries with declining proportions of working-age people now, plus China, accounted for 60 per cent of global economic output in 2012, according to Haver Analytics, a research firm.

The drops are small, a few tenths of a percentage point each year off proportions of working-age people, which had peaked in developed countries at 61.4 per cent in 2009.

But Research Affiliates expects the working-age share of total population to fall steadily for several decades, slowing economies each year, until they bottom out at about 50 per cent in 2040 or so. A country can compensate for this demographic drag on economic growth by encouraging people to work longer or to use technologies to increase output. But most economists doubt that such changes are forthcoming or would be enough.

"You need incredible productivity growth," says Michael Feroli, a JPMorgan Chase economist. He says economic growth of 3 per cent is unlikely on a "sustained basis".

Robert Arnott, chairman of Research Affiliates, thinks investors and policymakers don't realise how much demographics will hurt economies now because they never appreciated how much they helped in the past. Payrolls rose as the oldest baby boomers started working in the mid-1960s - then kept rising as those born later took jobs. Retirees were relatively few because most workers were young. And many women joined the workforce for the first time.

It was an unusual confluence of beneficial demographic shifts, and perhaps unrepeatable.

"The developed world in the past 60 years has had the most benign demography in the history of man," Arnott said. But economic growth in developed countries will "tumble" to no more than a tepid 1.5 per cent a year, on average, until 2040 or so, he estimates.

Others note that smaller families are associated with some social benefits for societies. Births have plunged in countries where education has improved, the middle class has expanded and women have gained more freedom and rights.

Still, even optimists see the world as at a delicate crossroads.

Reiner Klingholz, head of the Berlin Institute for Population and Development, says societies are unsure of their goals now that easy economic expansion is over.

"We have no plans for how to run a society without growth," he says.

Many economists think demographic headwinds are just too strong to expect a jump in growth. The best hope is an unexpected innovation leading to a burst of efficiency in the workplace. "Unless there is a technological miracle, demography alone points to 1 to 1.5 per cent being the new normal," Arnott says.

And 3 per cent? That's "the new definition of boom times".