From Demographic Boom To Dependency Bust

The economic and asset bubble in Japan burst in 1990, at roughly the same time as its demographic structure reached a tipping point. As UBS' George Magnus notes, the working age population began to fall, marking the start of a relentless rise in both the total and old age dependency ratios; and, he adds, a comparable phenomenon occurred in the US and Europe between 2005-2010. On current trends, Magnus warns, China will replicate at least the demographic part of this phenomenon between now and 2016, against a backdrop of rising concern about the structural nature of the slowdown in economic growth, along with rising credit intensity, indebtedness, and misallocation of resources.

Via UBS' George Magnus,

The suggestion of causality running from demographic tipping points to major economic crisis is, of course, provocative. But even if there are more proximate causes and explanations, the fingerprints of demographics are indisputable. All periods of rapid economic growth, credit expansion, technological advance and financial euphoria are invariably followed by a sombre hangover. Japan blazed this trail a little earlier, but other Western economies followed in the 1990s and 2000s. These trends were unquestionably driven in part by the so-called demographic dividend, or the phase in which the baby boomers reached the age range associated with a change in savings and consumption behaviour. The demographic dividend has now turned into a drag.

The combination of weak fertility and rising life expectancy, with its consequences for the working age population and old age dependency is unique. Advanced economies simply cannot replicate the relatively rapid recovery by Asian economies out of the balance sheet crisis of 1997-98, bearing in mind the region’s younger, expanding populations.

Adding the youth and old age dependency or support ratios, we can now see a different picture.

The "Total Support Ratio" Boom and Bust

From the 1960s onwards - a little earlier in Japan - the total support ratio rose everywhere and more or less continuously, until about 1990 in Japan, and 2005-2010 in the US and Europe.

The peaks coincided pretty well with the peaks in economic expansion and asset markets. The turn down in the total support ratio, however, is significant because it represents the combination of the negative, second-round effects of falling fertility on the working age population, the end of the fall in youth dependency, and, importantly, the point at which rising total dependency is exclusively down to the increase in old age dependency.

Japan’s support ratio is now approaching 1.5 workers per older citizen, and is predicted to carry on falling to parity in the middle of the century. The US and Europe are predicted to follow Japan, though support ratios are not expected to fall as far.

Demographic weaknesses in the labour market, exacerbated by the on-going balance sheet recession, are contributing to a loss of consumer, homeowner, and entrepreneurial mobility and flexibility. This undermines the productivity and higher labour force participation, which constitute two important coping mechanisms for population ageing.