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Close Look: January 2023

one year ago

Demographic dividend: what’s the big story?

As all investors know, a dividend is a reward paid to shareholders for owning a company with sustainable profits. Used in the context of a nation’s population, the term ‘demographic dividend’ describes the positive effects that a growing population can have on a whole economy. But why is this expansion so good? We take a look at the benefits of population growth and how that could work in reverse.

A growing population, with a rising birth rate, should create a predominantly young and healthy workforce, although with increased education costs to be factored in. A bigger and busy workforce means an expanding marketplace for good and services. Although some goods will be sourced abroad, this should bring a steady increase in domestic demand, resulting in a virtuous circle of growth. This can typically be the case for well-run emerging economies.

Conversely, many developed market economies are facing falling birth rates and their populations are in decline. Examples range from Italy to Japan. This can result in a ‘top heavy’ population where the over 65s require increasing support from a diminishing proportion of productive citizens. The spending potential of the workforce is constricted and, as the elderly typically spend less money anyway, demand will naturally shrink.

But it is not only developed economies that can experience this decline. China, which has expanded rapidly in recent decades to become the most populous country in the world, announced that in 2022 its population, at just over 1.4 billion, had fallen for the first time in six decades. The cause seems largely policy driven, as the Chinese were restricted by the one child policy for more than thirty years. But, as one of the great engines of global growth, this news from China has been met with wider concern.

By contrast, India’s population is still expanding and at just under 1.4 billion people, is likely to overtake China in 2023. Africa has the fastest growing population of any continent, with forecasts of 1 billion new urban residents by 2050. These areas will likely be the drivers of global demand in the future. A fact not lost on multinational corporations, hungry for the growth dividend that their domestic markets are unlikely to yield. And with that the growth in profits that their shareholders demand.

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