Fertility crisis escalates, reshaping the economy's landscape long-term
Lower birth rates have long been a concern for economists, who worry that declining populations could lead to labor shortages, inflation, an upheaval of consumer cultures, and the overburdening of government programs for aging populations.
These changes are now occurring. A recent study by the Organisation for Economic Co-operation and Development (OECD) predicts that dropping birth rates will permanently alter the demographic makeup of the world's largest economies over the next decade.
What's happening: If forecasts hold up, 2064 will be the first year in modern history where the global death rate surpasses the birth rate.
Already, many large economies are experiencing it, as the total fertility rate among OECD's 38 member countries dropped to 1.5 children per woman in 2022 from 3.3 children in 1960. This is well below the "replacement level" of 2.1 children per woman needed to maintain a stable population.
This means the workforce in many countries is rapidly shrinking. In the 1960s, there were six workers for every retiree. Today, it's approximately three-to-one. By 2035, it's predicted to be two-to-one.
Top executives at U.S. companies mentioned labor shortages nearly 7,000 times in earnings calls over the last decade.
"A reduction in the workforce can lead to labor shortages, which may increase the bargaining power of employees and raise wages – all of which is ultimately inflationary," Simona Paravani-Mellinghoff, managing director at BlackRock, wrote in an analysis last year.
Immigration has historically helped offset demographic issues in wealthy countries, but the declining population is now a global trend. "This is critical because it implies advanced economies may begin to struggle to import labor from such places either via migration or sourcing goods," wrote Paravani-Mellinghoff.
By 2100, only six countries are expected to have enough children to maintain their populations: Africa's Chad, Niger, and Somalia, the Pacific islands of Samoa and Tonga, and Tajikistan, according to research published by the Lancet.
BlackRock advises its clients to invest in inflation-linked bonds and inflation-hedging commodities such as energy, industrial metals, and agriculture and livestock.
What this means: Business leaders and politicians are already preparing for the low birth rate.
Elon Musk, father of 12 children, has stated that falling birth rates will lead to "a civilization that ends not with a bang but a whimper, in adult diapers."
While his words may be inflammatory, they are not entirely wrong. P&G and Kimberly-Clark, which together make up more than half of the U.S. diaper market, have seen baby diaper sales decrease over the past few years. However, adult diaper sales are a growing market for them.
Other companies are also focusing on an older demographic. Nestle's CEO recently said he's shifted the company's priorities from producing infant formula to serving the nutritional needs of adults over the age of 50.
Strained governments: French President Emmanuel Macron announced in January a plan for "demographic rearmament" in France through fertility testing and extended parental leave. Former U.S. President Donald Trump recently promised to support "baby bonuses for a new baby boom" in the United States.
The U.S. birth rate in 2023 fell to a record low, reversing a small increase seen during the Covid-19 pandemic. The Congressional Budget Office (CBO) also predicts that deaths will outnumber births just over 15 years from now.
These findings underpin the agency's economic forecast and budget projections, said Molly Dahl, a senior advisor at the CBO.
"What you're seeing is increased spending on programs like Medicare and Social Security as the baby boomers age into those programs, and of course, fewer workers relative to the number of people receiving Social Security and Medicare benefits," Dahl said.
Social Security payments still provide about 90% of income for more than a quarter of older adults in the United States. But without intervention, the Social Security trust fund will be depleted by the mid-2030s, meaning that only a portion of retirees' expected benefits will be paid out.
The AI solution: Some business leaders and technologists see the advancements in artificial intelligence as a potential solution to the demographic crisis.
"The facts are clear. We are not having enough children, and we have not been having enough children for long enough that there is a demographic crisis," former Google CEO Eric Schmidt said at the Wall Street Journal's CEO Council Summit last year.
"In aggregate, all the demographics say there will be a shortage of humans for jobs. Literally too many jobs and not enough people for at least the next 30 years," Schmidt said.
He believes that artificial intelligence will significantly ease these issues. A recent report by Goldman Sachs predicts that generative AI could increase global GDP by as much as 7% over a 10-year period.
However, some experts say it is too early to tell how AI will impact the global economy.
A recent study by analysts at the Federal Reserve Bank of Richmond concluded that artificial intelligence could increase labor productivity between 1.5% and 18% over the next decade. "This ranges from barely noticeable to substantial," they said.
Long-term solution to dwindling birth rates, as per Stefano Scarpetta, director for employment, labour, and social affairs at the OECD, involves promoting gender equality and equitable division of work and child-rearing. This includes offering extended paid leave and financial aid. According to him, this isn't a temporary dip. Businesses and governments need to be ready for a "low-fertility future" as a matter of urgency.
Chinese Premier Li Qiang has cautioned against an economic decoupling from the West, calling it a "vicious cycle." During a talk with international business leaders at the "Summer Davos" forum in Dalian, Li also defended China against allegations that it has excessive capacity in green industries, resulting in dumping of goods like EVs and solar panels on foreign markets.
Li warned that if countries only focus on their own interests, ignoring others, and even resort to decoupling, it will escalate societal and global economic costs, pushing nations into a self-perpetuating cycle of competition over a shrinking market. This he said is something undesirable.
China's second most powerful leader after Xi Jinping made these remarks a day after Canada announced plans to consider imposing tariffs on EVs made in China. The Canadian government claimed its workers face "unfair competition" due to China's state-directed policy of overcapacity. A 30-day public consultation period will begin next month to evaluate potential responses.
The Biden administration previously quadrupled tariffs on EV imports from China from 25% to 100%, aiming to protect American jobs and production. Chinese EV sales to the United States are minimal.
In a different development, prosecutors are pressuring the US Justice Department to file criminal charges against Boeing for safety concerns related to its 737 Max. While top Justice Department officials haven't made a decision yet, Boeing faces mounting challenges to its reputation. Beyond the two 737 Max crashes in 2018 and 2019, the company has been asked numerous questions about its jet's safety and quality. In January, a door plug on a 737 Max flown by Alaska Air blew out mid-flight, creating a large hole in the jet, adding to Boeing's tarnished image.
The Justice Department and Boeing had reached a settlement agreement in January 2021 to resolve allegations that Boeing defrauded the Federal Aviation Administration during the 737 Max's certification process. The plane entered service in 2017 but was grounded for 20 months due to two fatal crashes. The cause of the crashes was a design flaw, which Boeing has acknowledged.
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In response to the declining birth rates, business leaders are investing in inflation-linked bonds and inflation-hedging commodities such as energy, industrial metals, and agriculture and livestock to offset potential inflation caused by labor shortages.
The shifting demographic landscape has prompted top executives to reconsider their strategies, with some focus shifting from producing infant formula to serving the nutritional needs of older adults.
