McKinsey 'confronts a new demographic reality'

McKinsey does a look at the effects of aging on GDP

• what aging nations need to do in order to maintain gdp/capita growth (hint: a lot)

• the real cause of the GFC (speculative)

• the shape of consumer lifecylces are ubiquitous

• the shape of fiscal deficits are too

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McKinsey ‘confronts a new demographic reality’

McKinsey did a long report on the effects of aging, specifically with respect to growth, and gdp/capita.

Suffice it to say, aging is a big deal, and great that everyone is noticing.

The gist of the report is that some combination of above-trend population growth, productivity, and/or ‘labor intensity’ (i.e. more work) is necessary to maintain gdp/capita growth. Put another way, we will not maintain gdp/capita growth, unless we make some very big changes (with all the caveats that forecasting the future, is a fool’s errand).

The FT also has some coverage here.

There are lots of good charts, but if I were to pick one “money chart,” it’s this one:

McKinsey

In order to maintain gdp/capita growth, every major economy in the OECD has to either:

• (a) increase participation rates;

• (b) increase the number of hours per worker; and/or

• (c) increase productivity growth to levels unseen in the past 25 years.

. . . or some combination thereof.

The exceptions appear to be China and South Korea, who could return to 1997-2003 levels of productivity growth (or in China’s case, even less), and achieve gdp/capita growth “in line with a developed nation.” China (and Korea) are preparing for their demographic winters differently.

But, to give you a sense of the challenge, take Spain, as an example. To keep pace, Spain will need to either (a) increase participation rates by more than 20 percentage points; (b) add an additional 13.6 hours to everyone’s work week; and/or (c) quintuple the rate of productivity growth.

Never say never, but it’s not gonna happen. GDP/capita growth is going to slow, and then some.

Anyways, and back to the broader story, why this is the case, is pretty straightforward: older (and very young) people tend to consume more than they produce.

McKinsey has a nifty chart for this also:

Consumption grows more or less steadily, while production (as measured by income) peaks in the middle years.

Likewise, the middle-years create the surpluses, while the early and later years, create the deficits.¹

And so:

• As the demographic “mix shift” skews towards older people, a relatively smaller share of the population is responsible for carrying the collective load.

• If that collective load is going to grow as quickly as before, then that load-bearing share of the population has to knock it outta the park, like never before.²

Hence, to keep pace, an older nation will have to get more people to work, and/or get more out of the working people that it has. It’s that simple.

No great insight there, but, nonetheless, denial (or at least, inattentiveness) abounds.

The implications are (again) broadly that quality of life improvements should slow down, at least as measured by gdp/capita (unless there are some big changes).

Relatedly, as older people take a larger share of spending, consumption will shift towards healthcare (and away from stuff like education). One would also expect that the workforce will get older too, as people work later in life.

It’s not the most exciting outlook, but it doesn’t have to be the worst one either, provided that we’re realistic about what’s coming, and what the challenges are. Time is (as yet) undefeated—some slowing is inevitable—but eventually, the age curve should begin to reshape, and we’ll be off to the races.

Plus, there’s all the cool stuff we’re gonna do, in the meantime, to increase productivity, and otherwise solve the problem of “doing more with less.”

The issue, of course, is that instead of preparing for the challenges, we’ve been acting like Spring is right around the corner, and well, it’s not.

But, I digress, and the goal here isn’t to cover old ground. I just wanted to highlight a few more selected charts that Random Walk found interesting.

The real cause of the GFC

Random Walk has long been fascinated by the argument that the real cause of the GFC was a demographic tailwind coming to an end.

In other words, the reality that kicked-off the crisis was that organic demand growth, i.e. the growth of working age people, finally rolled-over: