Moody’s Warns of Economic Strain from Aging Populations
- Moody’s reports that aging populations in Western countries will strain public finances.
- Europe’s population may peak by 2029, while the U.S. may not peak until 2080.
- The aging demographic will prompt difficult policy decisions as economic growth slows.
Credit rating agency Moody’s has issued a warning concerning the impact of aging populations on public finances, noting that the situation will be particularly acute in Western countries. The demographic shift in Europe is especially significant, with the European Commission projecting that the population of the European Union could peak as early as 2029, leading to what they describe as a “sustained long-term decline.”
In contrast, the U.S. Census Bureau estimates that the American population won’t peak until 2080 according to its main projection, or until 2043 in a low-immigration scenario. However, the decline in population, excluding the impact of immigration, has already commenced.
Moody’s has highlighted that the pressing fiscal challenges posed by aging populations will manifest long before populations begin to decrease. Currently, G7 nations have a ratio of approximately three working-age individuals for every person over 65. This ratio is expected to decrease to two by 2050, creating additional pressure on economic growth and public finances, particularly on healthcare systems.
Olivier Chemla, Moody’s vice president of credit strategy and standards, discussed the economic ramifications of aging populations during an appearance on CNBC’s “Squawk Box Europe.” He noted that the impact would include slower economic growth, increased pressure on public finances due to pension and care costs, shifts in consumer demand, and changes in real interest rates and sovereign yields.
Moody’s recently published report emphasizes that these global demographic changes will lead to fundamental shifts in the economy and necessitate challenging policy decisions. Falling fertility rates and rapid changes in age structures are reshaping the traditional benefits of population growth, which has historically been positive for creditworthiness.
The report outlines that a reduction in the workforce will restrict productive capacity, while a decrease in households will weaken consumer demand, making it essential for countries to depend more on productivity for sustained growth.
The AI Impact
Chemla also addressed the role of artificial intelligence (AI) in mitigating some challenges posed by an aging workforce, stating that while it can enhance productivity, it is only a partial solution. He explained, “This is a partial mitigant because you can certainly replace and enhance the supply side of the economy in factories and in services, but at the same time, robots do not consume – at least not yet – and so on the demand side, you will still be having that gap, which will slow growth.”
Additionally, the phenomenon of aging populations is not limited to Western countries. Emerging economies are also experiencing significant demographic transitions. For instance, China’s proportion of individuals aged 65 and over has increased from 7% to 14% in the last two decades, with similar trends observed in Brazil, Thailand, and Turkiye. These countries are expected to confront the financial burdens associated with aging populations while at lower income levels than those of the advanced economies that aged earlier.
News Courtesy of CNBC
