Falling birth rates raise prospect of sharp decline in wealthy country living standards

Without action, “younger people will inherit lower economic growth and shoulder the cost of more retirees", especially in some wealthy countries, McKinsey Global Institute director Chris Bradley said. Photo / 123rf

Many of the world’s richest economies will need to at least double productivity growth to maintain historical improvements in living standards amid sharp falls in their birth rates.

A McKinsey report investigating the economic impact of declines in birth rates found the United Kingdom, Germany, Japan and the United States would all have to see productivity rise at double the pace over the past decade to maintain the same growth in living standards witnessed since the 1990s.

The consultancy’s report, published on Wednesday, showed that to match GDP per capita growth between 1997 and 2023, productivity growth in France and Italy would need to triple over the coming three decades.

In Spain, it would need to rise fourfold between now and 2050.

The report highlights the stark impact of declining birth rates on the world’s most prosperous economies, leaving them vulnerable to a shrinking proportion of the population of working age.

Without action, “younger people will inherit lower economic growth and shoulder the cost of more retirees, while the traditional flow of wealth between generations erodes”, said Chris Bradley, director of the McKinsey Global Institute.

Governments globally are struggling to contain a demographic crisis amid rising costs for housing and childcare, as well as social factors such as fewer young people being in relationships.

Two-thirds of people now live in countries with birth rates per woman below the so-called “replacement rate” of 2.1, while populations are already shrinking in several OECD member states – including Japan, Italy and Greece – along with China and many central and eastern European countries.

“Our current economic systems and social contracts have developed over decades of growing populations, in particular working-age populations that drive economic growth and support and sustain people living longer lives,” said Bradley. “This calculus no longer holds.”

Bradley, who co-authored Wednesday’s report, said there was “not one lever to fix” the demographic challenges.

“It’s going to have to be a mix of injecting more young people into work, longer working lives, and hopefully productivity,” he said.

The report follows similar warnings by the Paris-based OECD, which last year said declining birth rates were putting the “prosperity of future generations at risk” and urged governments to prepare for a “low-fertility future”.

McKinsey calculated that in western Europe, the decline in the proportion of people of working age could dent GDP per capita over the next quarter of a century by an average of $10,000 per person.

While some economists believe generative AI and robotics could enhance productivity, there is little sign of that happening in a meaningful way yet. Productivity across Europe has largely stagnated since the pandemic, widening a gap that opened up with the US since the financial crisis.

The consultancy argued more countries will have to encourage people to work for longer, following the example of Japan, where the labour force participation rate among people 65 years and older is 26%, compared with 19% in the US and 4% in France.

Despite longer working lives, Japan’s GDP per capita has grown by little more than a third of US levels over the past 25 years.

“The demographic drag is inexorable and severe, and when it hits, boosting productivity growth becomes even more relevant,” the report added.

The consultancy calculated that to keep living standards rising at the same rate, a German worker would have to work 5.2 additional hours per week or the share of the population in work would need to increase by nearly 10 percentage points from its current level of nearly 80% among people aged 15 to 64 years.

The UK and the US required a lower level of additional work, thanks to more favourable demographic prospects, but Spain and Italy would also need an increase in the share of people in the labour force by double-digit figures.

Written by: Valentina Romei in London

© Financial Times