A brief recap of UNPD’s latest findings

As you may recall, the fertility rate needs to be 2.1 for the populace to reproduce itself.  In 1950, it stood at about 5 worldwide.  By 2021, the global fertility rate had dropped to 2.3, and it is now expected to decline to 2.1 by 2050.  Although Guterres spent virtually no time on declining fertility rates, that is the reason the new estimates have been reduced so much.

The sharp decline has had the effect of dramatically slowing population growth.  Worldwide, for the first time ever, it dropped below 1% in 2020, and it will continue to decline for many years to come.  Mortality, on the other hand, will continue to improve for all the reasons mentioned by Guterres.  Globally, life expectancy at birth now stands at 73 years – an improvement of almost 9 years since 1990.

About two-thirds of the expected growth in population between now and 2050 will be driven by the momentum caused by past population growth.  Population growth was quite healthy 20-30 years ago, and the children born then are now adults at the peak of reproduction.  This will change dramatically, though.  Beyond 2050, there is no such momentum to benefit from, and the growth rate will drop noticeably as a result.  More on this later.

The 2022 UN paper concludes that deaths will begin to exceed births in the late 2080s (Exhibit 1), i.e. the global population will begin to drop at that point.  UNPD now expects the population worldwide to reach approximately 10.4 billion when that happens.  Below, I will give you some reasons why this is likely to happen sooner, and what that means from an investment point-of-view.

Why the curve will break sooner than predicted by the UN

Two factors drive fertility rates – urbanisation and the empowerment of women.  In a rural environment, a child is an asset – an extra pair of hands to milk the cows, so to speak.  In an urban environment, children become a liability, at least from a financial point-of-view.  You need more space when adding a(nother) child, and you have an extra mouth to feed.  Therefore, all logic suggests that, as the global population continues to migrate to urban areas, the fertility rate will continue to drop.  Actual numbers support that logic (Exhibit 2).

The other key driver of fertility rates – the empowerment of women – is somewhat more multifaceted.  Experience has shown that education plays a major role.  Research from the UN shows that education leads to employment, which again leads to higher living standards and lower fertility rates.  That said, data from the world’s most developed countries imply that, as far as the workforce is concerned, we will probably never reach 1:1 participation anywhere.  Take for example the Netherlands or the three Scandinavian countries.  When they reached a level of eight women for every ten men in the workforce, the curve began to flatten.  Having said that, many countries – and I would include numerous DM countries – are still far from the female participation levels reached in Northern Europe.  Therefore, the urbanisation trend will continue, and it is a global trend.

Other factors, such as the lower impact of religion and easier access to contraception, have also had a role to play, as far as falling fertility rates are concerned; however, those two factors are also ultimately about the empowerment of women.

These trends are obviously well known to UNPD, but its population forecasts continue to be too high, so something must be astray.  What is that?  In essence, the mistake UNPD makes (according to Darrell Bricker and John Ibbitson, who are my main source on this particular issue) is that, in its models, UNPD assumes that history repeats itself, i.e. that a country at a certain stage of the urbanisation and empowerment cycle will mimic other countries’ fertility rate, when they were at the same stage of the cycle at some point in the past.  In other words, behind UNPD’s projections is an assumption that the rate of fertility decline is constant.  That assumption has turned out to be incorrect, hence why UNPD has had to adjust its forecasts downwards.  In the following, I will argue that this is only the beginning.

A more likely future?

We know that urbanisation leads to the empowerment of women, and we know that the financial calculus of having children must change when people migrate to urban areas.  Therefore, we should expect urbanisation to lead to families having fewer children and having them later.  There is a virtually unlimited amount of anecdotal evidence to support that view.  Professor Wolfgang Lutz of Vienna University, who is one of the world’s leading experts on demographic trends, puts it this way:

The brain is the most important reproductive organ.  Once a woman is socialised to have an education and a career, she is socialised to have a smaller family.  There is no going back.

He believes that better education, brought about as a consequence of urbanisation, will result in a dramatic reduction of the birth rate and shouldn’t be ignored by UNPD, as it is at present.  As leader of the demographic work at the International Institute for Applied Systems Analysis (IIASA) in Vienna, he has developed an alternative, probability-based model that takes a host of other factors into consideration – factors that are ignored by UNPD.

According to the model he and his colleagues have developed, there is an 85% probability that the world population will peak this century and most likely sometime in the late 2060s.  Furthermore the model suggests a 60% probability that the world population will never exceed 10 billion, and about a 15% probability that, in year 2100, the world population will be lower than it is today (Exhibit 3).

I should point out that Lutz’ thinking is not exactly new.  He developed what has proven to be a very precise forecasting model all the way back in the 1990s, and I wonder why UNPD has chosen to stick to its own, inferior model.  Is it politically motivated?  Your guess is as good as mine.

I should also point out that the chart in Exhibit 3 above was first published in 2001.  Actual data from the subsequent 20 years shows that actual numbers continue to come in relatively close to the median line – the base case in Wolfgang Lutz’ research – but that, if anything, actual birth rates have come in on the low side of the median line, i.e. the world population may peak even earlier and at a lower level than that projected by Wolfgang Lutz (9.4 billion in the late 2060s).

More on the link between urbanisation and fertility rates

As is obvious when you compare Exhibits 4a and 4b below, there is a very powerful link between the degree of urbanisation and fertility rates.  As you can see, Africa, Asia and parts of South America are all characterised by low urbanisation rates, and those parts of the world also have the highest fertility rates.

That said, even in the developed part of the world, where the urbanisation rate does not vary dramatically from country to country, the fertility rate does.  The best example of that is probably Europe.  Overall, the European fertility rate (according to PRB) is 1.5, meaning that Europeans no longer reproduce themselves; however, behind that number lies significant variations from country to country.  Near the bottom, you’ll find countries like Spain and Italy with fertility rates of 1.2.  At the other end, most countries in Northern Europe have fertility rates around 1.6-1.7.  Thus, although Northern European countries do not reproduce themselves, they will be less dependent on immigration to keep all wheels spinning.

One of the worst affected countries worldwide is South Korea.  With a fertility rate of only 0.8 (!), the population there will drop by more than 4 million between now and 2050, and the decline in the second half of this century is even bigger.  Other big Asian economic powers are also affected by low fertility rates.  Take for example China, where the fertility rate is only 1.3, demonstrating that the one-child policy has backfired spectacularly.  By comparison, the fertility rate in the USA is 1.6.

You may wonder why the US population is forecast to grow from about 332 million today to 363 million by 2050 despite the Americans ‘enjoying’ a fertility rate well below the rate of reproduction, and the answer is immigration combined with the delayed impact of low fertility rates.  Allow me to briefly explain the second factor.  If a reasonable number of babies were born 20-30 years ago, the population will grow today, even if the fertility rate has dropped below the reproduction rate more recently.  The impact will only be felt when those born today are old enough to reproduce themselves.

The same answer applies to certain European countries, for example the UK, where the population is expected to grow modestly in the years to come despite a fertility rate well below the reproduction rate (currently 1.6).

Why the implications are serious

In the following, I will assume that Wolfgang Lutz and his colleagues at IIASA will continue to be more accurate in their forecasting than UNPD.  Given that many countries do their long-term planning based on UNPD’s projections, the chances are that much long-term planning will take place on the basis of incorrect information.  This translates into plenty of misallocated capital.

One obvious example is how government choose to allocate the capital available between the youngest and the oldest in society, which affects all sorts of planning issues.  I should point out that the chart below (Exhibit 5) has been constructed based on UNPD’s numbers and therefore may underestimate the true problem.  Nevertheless, as you can see, over the next 25-30 years, the 65+ age group will grow very fast, whereas the number of 0-14-year olds will stay largely unchanged.  If you were to adjust the numbers in Exhibit 5 to take into account the work conducted by IIASA (which I cannot do, as I don’t have access to the underlying data), an even uglier picture should emerge.  Why ugly?  For the simple reason that children are future taxpayers; the elderly are not.

As Wolfgang Lutz has repeatedly pointed out, fewer than expected babies being born combined with better and better healthcare can only result in a populace that ages faster than projected.  As you can see, today, the 65+ age-group accounts for less than 1 billion people worldwide, but that number will, according to UNPD, grow to more than 1.5 billion over the next 20 years and to 2.5 billion over the rest of this century.

Such a dramatic rise in the elderly population has significant implications tax-wise.  According to the NHS in the UK, an 80-year old Brit costs the NHS about 7 times more than a 30-year old Brit does.  It is therefore worth pointing out that the use of IIASA data would paint an even darker picture than the one that comes across in Exhibit 5.

A more realistic population outlook

In 2007, for the first time ever, more people lived in urban than in rural areas (Exhibit 6).  Today, some 15 years later, the urbanisation rate has risen to 56%, and it is expected that, in 2050, the urbanisation rate will have risen to 68% worldwide (source: UNPD).

The inevitable consequence of that is that the fertility rate will continue to decline, and because the rate of urbanisation is gaining most momentum in those countries with the highest fertility rate, the drop in in the number of births will also accelerate.  In other words, there is a serious flaw in UNPD’s model – it is based on an assumption that the rate of decline is constant whereas, quite clearly, it is not.  Therefore, UNPD’s population estimates will most likely continue to be on the on the high side.  Consequently, 10 billion people on planet Earth looks increasingly unlikely ever to be reached.

The ‘good’ news

A world with fewer people can only be good news for the climate.  I don’t think many will disagree with that; however, a more urbanised world is also good for the climate, and that shall definitely require some explaining.  Let me try.

Most of us probably think that if we could stop the ongoing migration wave to city life, much of today’s climate problems would go away, but exactly the opposite is the case.  If only we could persuade most people to live in a tin can in a mega city, we would have solved much of the problem.

Think about life in a city.  Londoners, for example, spend on average about 11 days every year underground.  By taking the tube, they contribute about one-sixth the amount of CO2 emissions they would have contributed, had they taken their car (source: The Empty Planet).  People living in rural areas, on the other hand, need their car for pretty much everything – to take the kids to school, to do the daily shopping, to visit family and friends, etc. – and the fleet of private cars is a major contributor to greenhouse gas emissions.

Therefore, you shouldn’t be too surprised when I tell you that the state of New York (urbanisation rate: 87.9%) is the least polluting US state on a per capita basis with emissions amounting to less than 9 tonnes of CO2 every year.  Meanwhile, Wyoming (urbanisation rate: 64.8%), one of the least densely populated states in the US, emits over 111 tonnes of CO2 per capita annually – a dubious national record.

One can therefore conclude that a world with fewer people, and with more and more of them living in urban areas, will, in many ways, be a better world.  Having said that, I will most likely face the counterargument that, although this may all be correct, it is not a phenomenon many of us will get to enjoy, as the big population decline won’t happen until the second half of the 21st century.  Whilst that is (technically) correct, the argument fails to consider the fact that the working age population will start to decline much earlier – in some countries, it is already happening (see Exhibit 7 later).

The not so good news

On the flip side, a smaller working age population could quite possibly create a structural inflation problem.  Inflation is already a major issue, and supply shortages are blamed – not so much labour shortages, but various commodities are indeed in short supply.  However, millions of workers all over the OECD will retire over the next few years and with that, various labour supply problems may follow.

The most obvious antidote to that problem is increased automation, which may explain why the countries that are facing the biggest decline in working age population – Japan and South Korea in Asia and Germany in Europe – are the furthest ahead when it comes to automating their industry.

The British have already had a taste of what labour shortages can do to inflation.  A large number of Eastern Europeans have left the UK after the British voted to leave the EU, and that has caused many problems.  Although Brexiteers don’t like to admit it, it is pretty obvious that the higher-than-average rate of inflation in the UK at present is because Brexit has added to all the inflation problems caused by supply shortages in various commodity markets.  Now, if that becomes a general issue across the OECD, we are certainly in for a regime change, as far as inflation is concerned.

Financial market implications

It is tempting to conclude that, whilst this could become a serious problem later this century,  there is not much to worry about the first ten years, but that is the wrong conclusion to draw!  Changing demographics are already, as we speak, having a meaningful impact on economic growth and therefore also on financial markets.  Let me remind you of the two drivers of economic grow:

If the worldwide population will begin to shrink in the 2060s as projected by IIASA, the working age population will do so, worldwide, 15-20 years earlier or within the next 20 years or so.  And, if you exclude Africa from your calculations, you will find that the global workforce has already begun to shrink (Exhibit 7).

As you can see, over the next few years, Germany will be the worst affected country.  (Please note that I have only include the biggest OECD countries in Exhibit 7 – click on United States Census Bureau if you want to check any other country.)  In the 20 years between 2030 and 2050, Japan and South Korea will move to the top (bottom?), although the numbers in Spain are not too good either.  Then, in the second half of the 21st century, the worst seems to be over for Europe, whereas Japan and Korea will continue to struggle.  

In other words, for many years to come, only robust productivity growth can prevent the OECD economy from declining.  If you look at the demographic backdrop globally, the working age population started to decline in Japan years ahead of most other OECD countries, and there is no prize for guessing which OECD country has endured the lowest GDP growth in recent years.

Admittedly, the arrival of advanced robotics has distorted the picture somewhat, but economic growth will still suffer from the ageing process.  Labour supply may not change as dramatically as the working age statistics imply, but demand for most goods and services will be unaffected by the arrival of advanced robotics.   Robots don’t eat, and they rarely go on holiday – simple as that!

Many parts of today’s service-driven economy will therefore be badly affected by ageing.  This implies that the low interest rate regime we have enjoyed in recent years could return.  We could be in for a few, nasty years, given the ongoing spike in producer and consumer prices but, longer-term, interest rates will most likely come down again, as central banks desperately try to stimulate economic growth (assuming it is within their mandate to do so).

Within the equity market, the most likely winners will be companies that come up with solutions to the productivity conundrum.  In that respect, technology stands out.  When, in 1987, the American economist, Robert Solow, quipped the now famous words, "You can see the computer age everywhere but in the productivity statistics”, little did he know that, 35 years later, this would still be a puzzle that so many struggle with (me included).  That said, higher productivity is the only solution to subdued economic growth when the workforce doesn’t grow.  Therefore, you can expect massive amounts of capital to be allocated to (supposedly) productivity-enhancing solutions.

On the negative side, retailers will likely suffer, as older shoppers spend less on discretionary items than younger shoppers do.  I would also urge some caution, when it comes to high street banks.  As we have learnt over the last few years, banks struggle to make a reasonable profit, when interest rates are very low.  Their margins simply go away.  If my conclusions in this paper are correct, banks have a few good years ahead of them, following which the party will be over for a long time.

The rollout of blockchain is also a risk to banks, even if it has little to do with demographic trends.  You may think of blockchain as the technology behind cryptocurrencies, and that is indeed correct, but it is also a technology that is a virtual minefield under the entire banking industry.  At worst (from the banking industry’s point-of-view), blockchain could make commercial banks entirely obsolete.  Many banks are busy implementing the technology in order to protect themselves, but that doesn’t provide any guarantees that there will be any commercial banks left by 2050.

Another area of concern – home builders and other companies exposed to residential homes.  In the long run – with fewer people on the planet – supply of residential properties will most definitely outstrip demand.  Before that happens, as people retire, they will begin to downsize, i.e. demand for bigger homes will fade, whereas demand for smaller homes will rise.  Recently, the down-sizing dynamic has been ‘jeopardised’ by COVID-19.  A significant number of people all over the world have changed their working routines as a result of the pandemic and now work from home at least 2-3 days every week.  In order to do so, they need an extra room to work from, resulting in a meaningful number of upgrades in the residential property market more recently.  That effect will gradually fade away, though.

On top of that, 10-15 years of extraordinarily benign monetary policy all over the world have lifted the valuation of most risk assets to unheard-of levels, which has driven wealth-to-GDP in many countries to levels never experienced before.  As I have pointed out before, wealth cannot grow faster than GDP in the long run, and some painful mean reversion is therefore on the cards.  Residential property is one of the biggest sources of private wealth in most countries, meaning that residential property prices will probably go through a nasty correction at some point over the next few years – another reason to stay clear of companies exposed to this sector.

Niels C. Jensen.

5 August 2022

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P.S. I want to thank Maisi Shapeero for providing much of the underlying data which has been used in this research paper.

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Supporting literature

Doubling of World Population Unlikely

W. Lutz, Vienna University, and W. C. Sanderson, Stony Brook University, 1997

The End of World Population Growth

W. Lutz, W. C. Sanderson and S. Scherbov, 2001

Dimensions of Global Population Projections

W. Lutz and S. Kc,  2010

Empty Planet – The Shock of Global Population Decline

Darrell Bricker and John Ibbitson, 2019

Fertility, Mortality, Migration, and Population Scenarios for 195 Countries

Stein Emil Vollset, Emily Goren, Chun-Wei Yuan, et. al., October 2020

World Population Prospects 2022

United Nations, Department of Economic and Social Affairs, July 2022

Adding Years to Life and Life to Years

McKinsey Health Institute, March 2022