Thematic view: Do demographics matter?

Market and economic highlights:

• September consumer inflation (CPI) prints released in October showed modest uplifts, primarily driven by rising oil prices. October consumer prices should adjust lower given that the average oil price in October was marginally lower than in September. From a South African perspective, this is anecdotally evidenced by downward adjustments to fuel prices (which kicked in on 1 November) through a lower Brent crude price. Our base case is for South African CPI to reach the midpoint of the central bank range over the next two to three months, while CPI in developed markets continues to trend towards and reach 2% over the next year or so.
• The Middle East conflict presents an upside risk to inflation. Some commentators have estimated that should the conflict have contagion across the region, the price of Brent crude reaching US$150/barrel is not outside the realm of possibility. Our base case is as long as Brent crude remains below US$100/barrel, there is little inflation risk.
• China’s economic rebound (and economic stimulus package) remains a central theme to both South Africa-specific economic performance and the performance of the global economy. There was some good data out of China, with an upside surprise to GDP and consumption expenditure, however, the outlook remains foggy and data has done little to boost sentiment.
• US GDP and personal consumption expenditure data remain robust and prove that we are in murky waters as far as the recession in the US is concerned. Our base case still points to a recession in the US within the first six months of 2024. The yield curve has been inverted for 12 months, a negative signal for a recession taking place and the duration of the recession. US economic data typically holds up for around 14 to 15 months after the yield curve inverts before we start to see broad-based weakness.
• The South African Reserve Bank decided by a small margin to keep interest rates unchanged during the last Monetary Policy Committee meeting. The market continues to price in at least one more 25bps (0.25 percentage points) rate hike before at least one 25bps cut over next year. Inflation trends in South Africa are supportive of the central bank cutting rates sooner rather than later. South Africa has structurally low growth, and interest rates are one catalyst to spur consumption expenditure (a key component of GDP). However, country-specific risks that impact the currency and the sovereign borrowing rate are keeping the central bank at bay (hawkish).

Thematic view: Do demographics matter?

Population growth is typically correlated with GDP growth and therefore slowing population growth should be negative for GDP growth. Technological advancement can however pick up the slack. For example, China’s population growth has been far slower than the per capita increase per employee’s contribution to GDP, which implies an additional factor other than a growing labour force has contributed to GDP growth. The major marginal productivity inputs are labour, physical capacity (i.e. fixed infrastructure) and technology. Evidence suggests gross fixed capital formation has fallen in emerging markets but remained fairly static among developed markets. This implies that technology has played a key role in GDP growth. We believe that while some global population dynamics paint a negative picture of global GDP growth, the marginal contribution of technology can be a tail-wind or counter-opposing force.

In April 2023, it was confirmed by the United Nations that India had overtaken China as the most populous country in the world. A key component of global GDP growth is household final consumption expenditure, which typically accounts for between 60% and 70% of GDP.  Given that India is now the most populous country in the world, this would have implications for GDP growth, particularly as far as consumption is concerned as well as when talking about India as a destination for external production capacity for some countries. The one COVID-19 policy in China offers an interesting opportunity for India as a production hub. Regulatory uncertainty in China (as far as the zero-Covid policy was concerned) led to supply chain issues globally. Regulatory uncertainty and consistent lockdowns were among the key drivers of the inflation problem in 2022.

Chart 1 below looks at the relationship between world GDP growth and world population growth. While we acknowledge that the explanatory power of population growth in relation to world GDP growth at around 16% is relatively low, the first suggestion from the regression is that population growth and world GDP growth are somewhat correlated. Our first assertion therefore is that, if the population grows, we would expect world GDP growth to follow the same trend.

Chart 1: World GDP and population growth

Date sampled: 4th Oct 2023
Source: Investec Wealth & Investment, UN

But as we can see in chart 2 below, we have seen a sustained decrease in the extent to which the global population is growing. This implies broad-based weaker global growth.

Chart 2: Slowing population growth

Date sampled: 17th Oct 2023
Source: Investec Wealth & Investment, UN

This is particularly true from a developed market perspective. Out of the sample of countries under observation, only Australia is growing above the world population median growth rate and has been the only developed market in the sample growing above the global average over the last 15 years or so.

Chart 3: Population growth in developed markets

Date sampled: 4th Oct 2023
Source: Investec Wealth & Investment, UN

Population growth trends are less concerning from an emerging market perspective, although of late only South Africa, Nigeria and India are at or above the global population growth median. Nigeria specifically stands out in this regard, growing at around 3% consistently since the 1980s.

Chart 4: Population growth in emerging markets

Date sampled: 4th Oct 2023
Source: Investec Wealth & Investment, UN

Another metric is concerning from a developed market perspective: the median age of the population. A combination of both slowing population growth as well as an aging population are negative. One is reminded of issues in France a few months ago when the country was engulfed in protests over proposed pension reforms that sought to increase the retirement age from 62 to 64 years to avert a collapse of the pension system. In essence, the country does not have the fiscal space to support retirees. An aging population requires growth in the employment base to keep the pension system in balance.

Chart 5: Median age in developed markets

Date sampled: 4th Oct 2023
Source: Investec Wealth & Investment, UN

The situation, again, is somewhat different for emerging markets. Emerging markets, in general, are below the global median population age. China and Brazil stand out, being the two in the sample above the global median. Average ages are particularly important given consumption timing. A younger population is typically associated with higher expenditure given the space for higher consumption spending and relatively greater capacity to borrow. An older population is typically gearing up for retirement, and the capacity to spend is lower.

Chart 6: Median age in emerging markets

Date sampled: 4th Oct 2023
Source: Investec Wealth & Investment, UN

As a final point, we look at how GDP per employee has grown in emerging and developed markets from 1990 to the end of 2022. Across both, the trend has been positive for the most part, as shown in charts 7 and 8 below.

Chart 7: GDP per employee (emerging markets)

Date sampled: 5th Oct 2023
Source: Investec Wealth & Investment, UN

Chart 8: GDP per employee (developing markets)

Date sampled: 5th Oct 2023
Source: Investec Wealth & Investment, UN

The real issue is the extent to which population growth has impacted the marginal productivity of labour across the sample of emerging and developed market economies. China, India, Nigeria, and South Korea stand out. In these economies, the multiplier effect of an additional unit of labour has translated into three times more economic output over time. What is most concerning is the case for Germany, France and the UK from a developed market perspective (the US and Australia to a lesser extent). The multiplier effect has been one-for-one in these developed markets. The same has been true for South Africa and Brazil. The worst-performing country is Japan, where additional units of labour are negative for economic growth.

Chart 9: GDP per employee and population growth

Date sampled: 5th Oct 2023
Source: Investec Wealth & Investment, UN

One saving grace in developed markets, given trends in the change in GDP per employee since 1990, is in gross fixed capital formation, which is a proxy for fixed investment in the respective countries. Investment creates efficiencies in the economy beyond labour-related efficiencies. This further enables economic performance and may protect economic performance as economies in developed markets a) age and b) grow more slowly.

Chart 10: Contribution of GFCF to nominal GDP

Date sampled: 5th Oct 2023
Source: Investec Wealth & Investment, UN

Of particular concern are the gross fixed capital formation (GFCF) trends in emerging markets, which have been on a negative trajectory for the better part of the last 50 years. This implies that economic performance in emerging markets may continue to be geared towards the productivity of labour in the short run.

Chart 11: Decline in contribution of GFCF to nominal GDP

Date sampled: 5th Oct 2023
Source: Investec Wealth & Investment, UN

In conclusion, the question goes further than simply answering how changing demographics may change the future structure of the global economy. The question delves into specific human capital, technology and fixed infrastructure development, which impact the relative efficacies embedded in the economy. From a fixed infrastructure perspective, developed markets continue to outperform the relative infrastructure investments in developing/emerging economies. This improves the marginal productivity of capital. From a human capital perspective, the risks are more nuanced when looking at the relative contribution of each employee per unit of GDP, as a combination of emerging economies and developed economies perform across the spectrum, however, China, India and Nigeria have more pronounced positive outcomes when it comes to the marginal productivity of labour. Nigeria continues to enjoy above-average population growth which implies, all things constant, that the Nigerian economy will benefit from the growing population. India’s population growth is in line with the global median, which also implies that India’s economy should benefit from this population growth. There are risks with China because of its below-average population growth. Developed economies more broadly are experiencing below world average population growth, which implies that developed economies would need to benefit from continued breakthroughs in technology.

Another risk in developing economies is that GDP may become constrained as the consumer base shrinks over the coming years. Remember that consumption makes up about 70% of GDP in the US and the trend is similar across most economies (between 60% and 70% of GDP tends to be consumption). The idea that emerging economies are set to become global centres of economic growth is not outside the realm of possibility. India, as the world's most populous country, may benefit from the strong marginal productivity of labour. Some countries are looking at shifting productive capacity from China to India given the recent regulatory uncertainty in China through the zero-Covid policy and its subsequent impact on global supply chains.

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