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Lower global economic growth expected over the coming decades
Amidst all the high frequency cyclical economic data, it is easy to lose sight of the slower moving underlying structural fundamentals. This week, we received a stark reminder of the demographic challenges confronting many major economies after both Japan and South Korea unveiled their latest birth statistics.
In Japan, total births fell to a record low of 758,631 in 2023, a 5.1% decline from the previous year. Sometimes records don’t mean much in economics given the short history of many data series, but Japanese birth data dates back to 1899, making this the lowest number seen in well over a century. Combined with rising death rates and low immigration, total population in Japan is estimated to have fallen 0.5% in 2023 to 124 million, down from a peak of 128 million in 2008-09. Estimates by the UN project Japan’s population to fall below 100 million in the 2050s, with population falling by an average 0.6% per annum over the 2024 to 2050 period.
If you thought the demographic trends were dire in Japan, South Korea is confronting even bigger challenges. This week, the number of births in South Korea were reported to have fallen 7.7% in 2023 to just 230,000. This represents a crude birth rate (births per 1000 of population) of just 4.5 compared to 6 in Japan and 11 in Australia. The South Korean government estimates the total fertility rate (the average number of children to be born per women over her lifetime) to have fallen from 0.78 in 2022 to 0.72 in 2023. This is the lowest rate seen in the world and dramatically below the replacement rate of slightly above 2. On average, the UN projects the population in South Korea to decline by 0.5% per annum over 2024-50, but these projections are likely to prove overly optimistic given the surprisingly swift drop in South Korea’s fertility rate.
Other East Asian economies are also facing demographic headwinds. Over the 2024-50 period, the UN estimates the population of Taiwan ( 0.2% p.a.), Hong Kong (-0.3% p.a.) and China (-0.3% p.a.) will experience significant declines. Many Eastern European countries, including Russia ( 0.3% p.a.), Ukraine (-0.4% p.a.), Hungary (-0.5% p.a.), Romania (-0.5% p.a.), Poland (-0.6% p.a.) and Bulgaria (-0.9% p.a.) are also expected to experience sizeable declines in their population over the next 25 years. The population in many advanced European economies are also expected to fall, with population growth across the euro area expected to decline by 0.2% per annum on average over 2024 to 2050.
While almost every country is expected to experience slowing population growth over coming decades, population growth over 2024-50 is projected to remain much more robust in Africa (2.1% p.a.) and in Central Asia and the Middle East (1.4% p.a.). Within our region, Philippines (1.1% p.a.), India (0.6% p.a.) and Indonesia (0.5% p.a.) are all expected to see moderate population growth. Population growth in the US is expected to continue to trend down, averaging 0.4% over 2024-50, around half the pace seen in the decade prior to COVID.
Top-line population growth also masks the true challenges confronting the global economy in the decades ahead. Populations are expected to age rapidly over the next 25 years, with the old-age dependency rate (the number of people aged 65+ as a share of the working age population aged 15-64) across the advanced economies expected to rise from 33% in 2024 to almost 50% by 2050. Ageing populations will be most pronounced in East Asia and Europe, with old-age dependency rates expected to rise above 70% in Japan, Hong Kong, South Korea, Italy and Spain by 2050.
These ageing populations will create many challenges for the global economy over the coming decades. Further strains on public finances are expected given fiscal costs associated with health care and pension payments amid a constrained tax base. With many countries already facing high government debt burdens and unsustainable budget positions, difficult fiscal choices will no doubt plague politicians in many countries over coming decades. In other words, the era where governments enjoyed a demographic dividend from a greater share of people moving into working-age brackets and contributing more to the tax pie is well and truly behind us.
This combination of slowing population growth and ageing populations will weigh heavily on potential growth in the global economy. Even accounting for a modest AI-induced recovery in productivity growth from the post-GFC slumber seen in advanced economies, potential growth across the global economy is expected to trend lower. QIC expects global real GDP growth (in PPP terms) to slow from 3.7% in the 2010s to 2.8% by the 2030s and 2% in the 2050s. For advanced economies, we expect growth to average 1.4% over the next 25 years, compared to 2.0% in the decade prior to COVID.
Notwithstanding these global headwinds, Australia is well placed amongst our advanced economy peers. Given ongoing strong migration, population growth in Australia is expected to eclipse almost every other advanced economy. Population growth in Australia is expected to average around 1.2% per annum between now and 2050, compared to 0.1% on average for advanced economies. While our population will also age, our population is expected to remain comparatively young, with our old-age dependency rate expected to rise from around 26% in 2023 to just 33% in 2050. These favourable demographic trends lead us to expect real GDP growth in Australia to average 2.4% over the next 25 years, down from 2.8% over the past 25 years, but around 1 percentage point stronger than the advanced economy average. Although Australia can’t escape the looming demographic challenges, we are in a much more enviable position compared to other advanced economies.