The next 50 years

By Tom Fennell
Illustration: John Sapsford

A dramatic shift in demographics is coming and it will have a long-term impact on a number of markets

Nineteenth-century French sociologist Auguste Comte said “demography is destiny.” If Comte were alive today, he could sum up the planet’s demographic destiny in one phrase: the world’s population is aging rapidly. With millions of baby boomers approaching retirement in North America and Europe, most of us are aware of the aging phenomenon in Western countries. But what may be surprising to many of us is that even developing countries, with vast numbers of young people under the age of 35, have sharply declining birthrates. For example, by 2040, China will be home to 400 million people over the age of 60, but if predictions hold true, its economy will be larger than that of the US.

The implications in these dramatic demographic shifts will be impossible to ignore over the coming decades as the world’s population peaks at 8.9 billion in 2050 and thereafter begins to decline. And the inevitable demographic change may well have a longer term impact on financial markets than such things as interest rates, currency moves and consumer spending.

Western countries
In August 2004, newspapers across North America carried stories about Costco’s decision to sell coffins in the US for $799. The stories were written in a lighthearted way, but the retailer’s decision was based on a hard business fact: more than 90 million North American baby boomers (currently aged 39-58) are moving up the pop-ulation pyramid. But until boomers are actually in need of this particular Costco item, they represent a huge market fuelled by more than $2 trillion in annual spending.

Anecdotal evidence suggests boomers intend to keep spending their money as they age. A recent study by Re/ Max concluded that, unlike previous generations that downsized and cashed in their home equity as retirement loomed, many boomers over the age of 50 are actually upgrading to more expensive properties and taking on new mortgages. The high level of disposable income they control is also creating markets and expanding existing ones. For instance, they accounted for 44% of all cosmetic procedures performed in 2001 and inflated the number of people taking ocean cruises to 10.6 million in 2004 from 4.5 million in 1990.

Boomers are also expected to trigger a wave of growth in the financial planning sector as they inherit $1 trillion over the next 15 years and rush to save for retirement. According to a Gallup poll, four out of 10 Canadians expect to inherit money, with some anticipating receiving $500,000 or more. More than 23% of those surveyed said they plan to invest the money, and 19% said they plan to use their inheritance to finance their children’s education. They also want more information about managing their investments, which is one of the reasons Canadian Business magazine recently cited financial planning careers as a growth area.

Still, the future surrounding the boom- ers is clouded in two areas: the continuing viability of public pensions and rising healthcare costs. By 2040, Canadian healthcare is expected to consume 40% of all government tax revenue. The fiscal picture is further complicated by the fact that, as the ranks of retired boomers swell, the number of workers paying taxes to support them decreases. This has left governments in North America and Europe facing some difficult choices: cut benefits, raise taxes or run deficits.

Emerging markets
North America’s aging population and its economic prospects are intimately tied to another phenomenon: the emergence of powerful new economic partners (and rivals) such as as India, China and Brazil. The impact of that growth has already been dramatic. So many consumer products are being produced cheaply in China and exported to the US that it is helping to contain inflation in North America. At the same time, the prices of basic commodities such as nickel, copper, oil and gas have been rising as demand in China increases.

But the demographic relationship between the West and emerging markets is about more than just manufacturing. Because population growth in most Western countries, including Canada, has fallen below the replacement rate of 2.1 children per woman, more skilled immigrants are required. Canada alone is accepting more than 250,000 a year and most come from developing countries in Asia. As the workforce in the West ages and education levels rise in emerging economies, this trend will accelerate.

For example, already 22% of all Indian nursing graduates find work abroad. At the same time, Western firms are outsourcing work to such countries as India, where the high-tech sector has been growing at a rate of 70,000 jobs a year.

Opportunities in change
The inevitability of demographic change will influence the market in a number of areas, including financial services, healthcare and resource development. As noted, baby boomers will have to begin saving more money now if they want to live well in retirement. This will raise the demand for sound financial advice, something polls reveal that boomers want more of.

As boomers age and consume more healthcare services, this sector will also grow. One of the key areas is the development of new drugs that will reduce the occurrence of such common illnesses as heart disease. Britain, for one, recently allowed a new group of cholesterol-fighting drugs to be sold over the counter in the hope that it will save money by reducing heart attacks in the wider population.

Technology will also play a key role, as government and industry deploy more technology to boost productivity even as the workforce grows older. It’s not surprising that Japan, with one of the oldest populations in the world, has the most robots deployed in factories. And firms such as Microsoft have launched programs with a mandate to develop new computer prod-ucts that will help aging employees continue to work efficiently.

While countries with older populations deal with issues such as healthcare, younger countries such as China and India are consuming more resources as they build capacity in labour-intensive industries and their economics modernize. This will benefit the countries that supply them, and Canadian companies are among the best positioned in the world to do so. Canada has both the expertise in resource development and vast supplies of timber, minerals and oil and gas.

While studying and predicting the impact of demographics on such areas as consumption and government finances is possible, it does not constitute an investment strategy. It does, however, indicate trends that will have a profound influence on the markets and provides potential insights into their likely direction — or as Auguste Comte would say, their ultimate “destiny.”