Demographic Change, Economic Dynamics and Quality of Life

Christophe Donay, Chief Strategist, Head of Asset Allocation & Macroeconomic Research

Demographic Change, Economic Dynamics and Quality of Life

Economists have long been interested in demographic developments, since traditional models present economic growth as a function of population as well as productivity growth.

However, it has become increasingly apparent that economic dynamics go beyond changes in capital and labour data in their narrowest sense and extend to include the complex interaction between demographic, economical, political and social trends.

In our view, making economic forecasts and formulating well-rounded investment cases mean understanding five major long-term demographic and quality-of-life factors at the centre of this complex interaction.

The first of these factors is how the ongoing population boom in Africa is driving world demographics. The United Nation's medium forecast is that global population growth will drop from just over 1% per annum today (compared to a peak of 2.1% in 1968) to 0.9% on average in 2020-2050 and close to zero at the end of this century. But the global figure disguises huge disparities, with Africa –where the population is growing by 2.5% per annum – overtaking Asia as the main source of world population growth. According to the UN, Asia and Africa together could account for 82% of the world population in 20100 compared with 76% today.

The second factor that needs to be considered in economic projections is the constant increase in life expectancy. Whereas at the beginning of the 19th century life expectancy nowhere was above 40 years, the average lifespan is now 77 years – a figure which is expected to rise to around 90 years towards the end of the century.

The third factor, a logical consequence of increasing life expectancy and low birth rates, is the rise in the the ratio of old people to the working-age population in western countries and some emerging ones too. The dependency ratio is expected to reach nearly 40% in Japan by mid-century, while steadying at 35% in Europe and climbing to 25% in China.

The fourth demography and quality of life-related factor forecasters and investors need to consider is urbanisation. By 2050, 70% of the world's inhabitants will live in urban centres, compared with 55% today (80% in developed countries and Latin America). The world's 100 largest cities, where one-fifth of the world population already lives, are set to swell further. With growing urbanisation will come increased energy requirements: urban centres already account for two-thirds of world energy consumption and 70% of CO2 emissions. Existing trends in this direction could even be speeded up as a result of the coronavirus pandemic. Furthermore, urbanisation is closely related to the rapid development of the digital economy.

The pandemic reminds us – as if we need reminding – that protecting health is a central requirement of life. The lack of government preparedness in most developed and emerging countries alike has forced them take emergency measures to stem the crisis, which immediately triggered a deep economic recession. For the first time, policy makers had to make snap decisions to prioritise saving human lives to saving economic growth. But the sharp recession (however brief) is leading to a looming social crisis that will have long-term repercussions for large swathes of economic activity. Preparing for the next pandemic means making health and wellbeing a central focus of policy making and placing them at the heart of how economies function. Policy makers need to realise that economic growth might not continue without attention to quality-of- life issues.


In other words, the fifth and perhaps the most significant demographic and quality-of-life factor that forecasters need to consider is a result of the first four – the burgeoning need for high-quality services and education that help an increasing urbanised population to adapt to a complex and constantly changing world. Simply, as the global population congregates more and more in urban areas, there is increasing demand for goods and services associated with wellbeing. At the same time, ageing populations will lead to a growing need for medical and personal services.

In the future, governments will be judged less in terms of their contribution to pure economic growth and the quantity of goods and services that people can buy, and more on the quality of life they can offer a country's citizens. We can see a premise of this in the way that employees already rate companies according to their ability to offer an inspiring and fulfilling work environment. Indeed, high staff ratings are already part of a corporate's “brand”.

Economists will increasingly use a similar type of ranking for economies, and investors will take these rankings into account when creating their portfolios. We thus see emerging what we call the "economy of living". Supported by economic policies, the economy of living has three main components: environmental protection, social justice and protecting democratic institutional frameworks (where they exist).

With covid-19 throwing pre-existing trends into even sharper focus, the economy of living – which essentially revolves around ensuring the conditions are in place for individuals to thrive – points to decline in some sectors and opportunity in others. It is clear that the losers will include fossil energy and carbon-based fuels, motor vehicles, the aviation industry, mass transport and mass tourism. Companies which operate in these sectors generally underperformed the markets overall in 2020. Certainly, the pandemic was the over-riding factor, but we would contend that all these sectors will have to adapt if they are to achieve the same kind of growth as in the past. The winners include alternative energies, education, agriculture and food, as well as health and ecotourism.

In short, for investors, investing in sectors and themes that take account of quality of life issues increasingly makes sense – and is fast becoming the most effective way to effect positive change and bring about a better future.


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