America The Youthful? Yes, On a Relative Basis
- Slower growth. While the United States' demographic advantage suggests it will grow faster than other developed countries, growth is still likely to slow without an influx of immigrants or a change in fertility rates. Over the long term, a country's growth rate is a function of just two things: growth in the labor force and productivity. Unless everyone suddenly becomes more productive, an aging population suggests slower growth relative to the post-WW II average.
- Lower rates. As populations' age, people do two things: they borrow less and buy more bonds. As a result, older populations tend to have a lower equilibrium point for real interest rates. This suggests that an eventual rise in real rates may be more tempered than many analysts expect.
- Larger Deficits. The recovery has temporarily flattered the deficit, but this will not last. By 2030 there will be 35 people 65 years and older for every 100 working age Americans. This ratio is more than twice the level of 1970 and significantly higher than it was when Social Security was first established. As the number of retirees increases toward the end of the decade, entitlement spending will surge. And with fewer working age Americans supporting this spending, deficits will increase over time. Without a change in policy, budget deficits will once again grow and continue to grow until entitlement reform is addressed.
While demographics are not destiny, they do matter for the economy and financial markets. Absent changes in birth rates, immigration, or fiscal policy, U.S. economic growth is eventually likely to be slower and fiscal strains greater. Though the United States does look to be in a better position than other developed countries, it may still fare poorly compared to its younger self. Investors who are looking to mitigate or avoid the impact of aging populations may want to consider select emerging markets with better demographic profiles such as Brazil, Indonesia and India.
Sources: Bloomberg, BlackRock research, Citi Research