Demographics and economic activity in the 21st Century

The shape of the global investment fundamentals

While markets await next week’s RBA rate decision (on hold) and their forward guidance (depends entirely on the Q3 CPI outturn – 50/50 on hold/rate cut), we lift our gaze to a broader topic – long run trends in global investibility. As readers of the Brief will remember, QIC has been developing an Investment Fundamentals Index (the QIFI) to compare countries’ attractiveness as an investment destination. In previous Briefs, we have looked at projections of the QIFI out to 2050. Today, we look at the historical performance of the world, the major regions and Australia, asking the questions, “what trends have been developing, and what trends have been fading?”

Notwithstanding the incredible bull run of equity markets, driven by the US market over the past decade, global investment fundamentals have deteriorated. The most obvious trend has been the worsening global demographics. Global population growth is slowing, driven by an ageing population. At the turn of the century, the global population grew at an annual rate of 1.4%. This has now fallen to a rate of 0.9%. Over the same period, the median age of the world’s population has risen from 25 in 2000 to 31 currently. As the population has been ageing, the dependency rate has been climbing. The old age dependency rate (i.e., the population 65+ as a share of those aged 15-64) has risen from 11% to 16% over the last 25 years.

The deteriorating demographics has shown up in drivers of economic growth. The growth rate in population of working age (a driver of labour input to economic activity) has also fallen from 1.8% in 2000 to 1.0% in 2024. Lower growth in working age population has left economies with shrinking growth in labour supply, dragging down the trend growth rate in global employment from 1.5% in 2000 to 0.9% in 2024. Also impacting global economic activity has been an adverse trend in labour productivity, which has fallen globally from an annual rate of 2.9% in 2000 to 2.1% in 2024.

The slowdown in productivity growth has occurred despite technological innovations of the last 25 years which include the internet, the uptake of personal computers, mobile phones and digitisation. Perhaps AI will be different and will lead to a lift in productivity growth rates. We will see. However, over the last 25 years the combination of lower employment and productivity growth has seen a dramatic decline in global economic growth from 4.8% to 3.3% over the last quarter century. How does Australia stack up against these global averages and importantly, from an investor’s perspective, against Australia’s Advanced Economy peers?

Australia is one of the few Advanced Economies where population growth rates have risen over the course of this century, from 1.2% in 2000 to 1.9% in 2024. Of course, Australia’s recent post-Covid migration surge has inflated recent population growth figures, but the Australian Government’s Centre for Population projects an average rate of population growth of 1.3% over the next decade, still higher than the rate at the start of the century. By comparison, the average annual rate of population growth of the Advanced Economies has halved from a tepid 0.6% in 2000 to 0.3% currently and although Australia’s population is ageing, it is doing so at a slower rate than almost all other Advanced Economies.

Australia is one of the few Advanced Economies where population growth rates have risen over the course of this century, from 1.2% in 2000 to 1.9% in 2024. Of course, Australia’s recent post-Covid migration surge has inflated recent population growth figures, but the Australian Government’s Centre for Population projects an average rate of population growth of 1.3% over the next decade, still higher than the rate at the start of the century. By comparison, the average annual rate of population growth of the Advanced Economies has halved from a tepid 0.6% in 2000 to 0.3% currently and although Australia’s population is ageing, it is doing so at a slower rate than almost all other Advanced Economies.

Although the median age of the Australian population has risen by three years since 2000 (from 34 to 37), the median age across the Advanced Economies has risen by double that amount from 36 in 2000 to 42 in 2024. Advanced Economies are also carrying a higher old-age dependency burden, with the aged dependency rate in Advanced Economies rising from 21% to 33%, while Australia’s has risen from a more modest 19% to its current rate of 27%. The more youthful Australian population is reflected in metrics underpinning economic activity such as the growth in working age population and employment. Growth in these two key economic activity metrics has remained robust, rising from 1.3% to 2.3% for the working age population, while maintaining a strong 2.0% average annual growth rate in trend employment. By contrast, global growth in these metrics has fallen, while the performance of Advanced Economies has been abysmal, with the annual growth rate in working age population falling from 0.6% to flat and trend employment growth falling from 1.0% to 0.7%.

While Australia’s demographic and employment metrics are among the world’s best, its Achilles heel is its poor productivity performance. Although Australia has enjoyed strong economic growth relative to its Advanced Economy peers, this outperformance is entirely due to strong employment growth rather than productivity growth. In 2000, Australia’s potential real GDP growth was a stonking 3.8%, driven by 2% employment growth and 1.8% productivity growth. By comparison, the Advanced Economies had potential growth rates of 2.8%, with productivity matching Australia’s at 1.8%, but with trend employment growth of just 1.0%. Fast forward to now and Australia’s economic growth potential remains higher than the Advanced Economies’ average (2.3% cf 1.8), but our trend productivity growth rate has sunk to 0.3% in comparison to the Advanced Economy average of 1.1% and the global average of 2.1%.

The macroeconomic fundamentals underpinning investment attractiveness have been in decline over the 21st century. This decline is a global phenomenon and virtually no country is exempt from negative trends in demographics and economic growth. As these trends continue over the coming decade, Australia stands out as a desirable investment destination, given its strong demographics and high rate of growth in economic activity for an advanced economy. Its current weak spot is productivity. If Australia can rebuild its productivity performance, it will stand out even more as shining light in a murky global investment landscape.