As the Western population ages, fewer workers and higher costs will reduce public finances, credit rating agency Moody’s has warned.
Europe is on the receiving end of demographic change. The population of the European Union is expected to peak in 2029, “after which a long-term continuous decline will begin,” according to the European Commission.
The US Census Bureau does not expect America’s population to rise until 2080 under the main projections, or until 2043 under the low immigration scenario. Excluding the impact of immigration, population decline has already begun.
But Moody’s says the fiscal pressures of aging appear long before the population begins to shrink.
Currently, G7 economies have about three working-age people for every person over 65. The ratio is expected to drop to about two by 2050, increasing pressure on growth and public finances, including the health system, according to Moody’s.
The aging population affects the economy through slower economic growth, more pressure on public finances from pensions and care costs, changes in consumer demand, and changes in real interest rates and sovereign yields, Olivier Chemla, vice president of credit strategy and standards at Moody’s, told CNBC “Squawk Box Europe” on Friday.
In a report published last week, Moody’s forecast that the world’s aging population will have a fundamental impact on the global economy and lead to difficult policy decisions.
While population growth has long been a tailwind for growth and creditworthiness, declining fertility rates and unprecedented speed of the age structure are now changing that picture, Moody’s writes.
“Fewer workers will limit productive capacity, while fewer households and consumers will reduce demand. Consequently, countries will have to rely more on productivity to maintain growth,” the report said.
The impact of AI
AI and increased productivity alone can offset the long-term challenges of an aging workforce, Chemla said.
“This is a partial mitigation because you can certainly change and increase the supply side of the economy in factories and in services, but at the same time, the robots do not consume – at least not yet – and on the demand side, you will still have the gap, which will slowly grow,” he said.
And not only Europe and the US, but emerging economies are also aging rapidly. The share of Chinese people aged 65 and over has doubled from 7% to 14% in the past two decades, with Brazil, Thailand and Turkey on a similar trajectory.
These countries will face the costs of aging with lower income levels than previous developed economies, the report said, noting that in Europe, similar changes took decades.