The coming demographics earthquake ft. prof Charles Goodhart

Demographers and economists historically neglected demographics in macroeconomic forecasting because market participants focus on short-term (1–2 year) asset price movements, not long-term demographic trends.

“most people are concerned about what is going to happen over the next year or two... if you've got money and you're interested in what's likely to happen to asset prices, what you're concerned about is what's going to happen to asset prices in the immediate future... So all market analysis or virtually all market analysis is very short term. And if you again if you look at the forecasts basically the forecasting that we're all doing is over what's likely to happen over the next year or two. Very rare to get much in the way of forecasting over longer periods.”

Geopolitics and great power competition are concerning, but within-country nationalism and inability to forge agreements (especially in the EU) are the more significant political risks.

“I think what really worries me is not so much the great power rivalry, but the inability of countries within the European Union to forge agreements... The ability of ordinary people in your country, my country, every country, to put the concerns of their own local nation above the overall prospects for larger areas and the world as a whole is very worrying. I would worry much more about nationalism in your country, my country, every country than I would worry about great power rights.”

Demographics is notably easier to forecast than most macro variables because workforce size 20 years ahead is already born and life expectancy follows predictable trends, yet receives minimal weight in forecasts.

“Now the problem is demographics, although it is actually easier to forecast because we know how long people live and we know the workforce of 20 years ahead is already born. So we know that. But it's very long term... it plays virtually zero role in the vast majority of the forecasts and the market analysis that we've got because it's all short term and demography is a long term consideration.”

Extreme political parties on both left and right claim they can solve fiscal/demographic problems but lack real means of achieving those solutions.

“most of the extreme parties on both the left and the right offer claims that they can solve the fiscal problem. And they have no real means of doing so, no real way of achieving that.”

Demographics is destiny—long-term demographic trends ultimately override short-term market momentum and geopolitical events.

“Demographics is still destiny, I guess.”

From the end of the 1980s to 2020, an increase in the number of workers in advanced economies combined with globalization and manufacturing labor availability kept inflation low, while rising inequality concentrated gains.

“Over the decades, the great decades, from the end of the 1980s, really, to about 2020, not only was there an increase in the number of workers in many advanced economies, in goods prices. And it also meant that there was a very considerable increase in the availability, particularly to manufacturers of labor. And that meant that inflation was low, but at the expense of rising inequality.”

Labor shortage combined with higher taxes on labor income will force workers to demand much higher wages, generating inflation pressure.

“when there's a shortage of something, the price tends to go up. And particularly since there will have to be higher taxes on labour, a combination of a shortage of labour and higher taxes on labour incomes means that they will ask for much higher wages.”

Fertility rates in advanced economies and East Asia have fallen below the sustainable replacement rate of 2.1 children per woman, with China at 1.0, South Korea below 1, and Japan at approximately that level.

“Every woman needs to have a fertility rate of 2.1 children in order to keep the population constant... The fertility rate in China is now as low as one. It's below one in South Korea. It's about that level in Japan.”

The worsening ratio of workers to retirees will dramatically increase the cost of providing pensions and medical support to the elderly, who are much sicker with higher care needs than younger populations.

“the ratio of workers to the old who are retired, dependent, and often needing care is worsening. There are going to be fewer workers for the old, and that is going to mean that the cost providing pensions and medical support to the old is going to increase dramatically.”

China's high personal savings rate (roughly 3x that of advanced Western economies) exists because there is no state pension provision; when China's demographic ratio worsens, the savings rate will likely collapse.

“Because in China, there is no state provision of pensions. So the savings rate in China, personal sector savings rate has been enormous. And something like about three times the savings rate in advanced economies in the West. Now, when the ratio of old to young increases, as it is increasing dramatically in China, what's going to happen there? Because will the... savings ratio go down a lot and if the savings ratio goes down a lot in China then likely to have sort of higher interest rates there'll be less investment I think and the growth worldwide will slow down.”

The 40 years from approximately 1980 to 2020 experienced extraordinary economic progress driven by favorable geopolitical and demographic tailwinds that have now reversed.

“People don't, I think, recognize how extraordinarily beneficial and how really wonderful the sort of years, particularly since the 1980s through to 2020, sort of 40 years of enormous, incredible progress. Although inequality within countries worsened. Inequality within the world as a whole decreased a lot.”

Migration from regions with young populations (like Africa) could potentially help offset some demographic problems in aging regions, but the political acceptability of large-scale migration is extremely difficult, particularly when migrants are visibly different from the host population.

“I don't know, it's a question of sort of the political acceptability. It's inevitably more difficult, I think, to have migration solve your demographic problems when the migrants are obviously different.”

Political parties and governments find it nearly impossible to simultaneously cut expenditures or raise taxes to sustainable levels, creating a political economy lock-in to fiscal unsustainability.

“the political parties, any political party, any government in power is going to find it almost impossible either to cut expenditures or to raise taxation.”

India and Africa may experience China-like growth if they achieve sufficient governance and education; India historically had high skill levels, and Africa has young, growing populations.

“Getting away from demographics for a moment, I've always thought that growth really was a function of good governance and good education. And one needs to remember that the Asian countries, historically, were... world leaders. China was the most advanced prosperous country in the world for millennia, really almost until the Industrial Revolution. And whatever else one can say about their government, under Deng Xiaoping and subsequently, it's at any rate economically being well governed. Again, the Indian population historically has had a large skill level.”

Asset markets are forward-looking in theory but short-termist in practice; investors will buy assets they believe will depreciate long-term if they expect near-term gains.

“asset markets are forward looking, right? But... we cannot predict what asset markets will do... even if you think that asset prices may go down and go down quite a lot, you don't want to sell now if you think that next week, next month, next quarter, they're going to go up further. So, and that's one of the problems. which is that you can go on having a belief that asset prices are always going to go up and the sort of momentum buying that you're going to buy because things are going up.”

Africa's population share will grow dramatically; Nigeria's population is projected to exceed the U.S. within 30 years, making policy toward Africa increasingly important.

“the share of the world's population that are born in Africa is going to increase quite dramatically. And there are some really quite sort of astounding figures that I think within about 30 years the population of Nigeria will be larger than the population of the United States.”

A world with major autocratic great powers is unlikely to persist; the temporary dominance of autocracies is far-sighted given demographic and economic constraints.

“that there's all a world with great powers is extremely temporary. I think the idea that we're going to live in a world of major great powers that are autocracies and that are like the present, I think it's very, very short-sighted.”

If the middle-class university-educated cohort finds its condition deteriorating due to AI, the political response could turn extremist, echoing the radicalization of displaced elites (e.g., Nazi Party leadership).

“one of the things that worries me is if the middle university trained graduate middle classes find that their condition becomes a lot worse with AI, what will their political response be? I don't know, but it could be. You know, one can argue that one of the reasons for the rise of Hitler was that the middle classes had had their assets and world wiped out by hyperinflation and were prepared to go extremist.”

China and Russia will not sustain great power status due to demographic collapse; China's trajectory will resemble Japan's—prosperous but no longer a major geopolitical competitor.

“is I think overstated because their fertility rate is so low that within two or three decades they will really start running into severe troubles. Severe troubles. Let me take a comparison. If you go back to the 1970s and 1980s, People seriously thought that Japan was going to be a major competitor in economics and power to the USA. If you look at Japan now, I need an advanced economy. People there are well off. But the idea that it is a major power sort of disappeared. I think China will go the way of Japan in the foreseeable future. And Russia.”

Funded pension systems (where individuals save into pension funds that invest in stocks and bonds) are not a solution to demographic unsustainability because the underlying dependency ratio worsens regardless of the financing mechanism.

“The answer is yes, and it won't work. It doesn't matter whether you try and fund it because the cost of funding it will become increasingly severe... When you get a worsening dependency ratio, it's just not going to work.”

China's growth was enabled by a demographic dividend (more workers relative to dependents) during a period when institutions improved under Deng Xiaoping, allowing investment-led growth.

“the period of growth for China was also coinciding with a massive demographic dividend where there were fewer children to take care of and not that many elderly to take care of. So just workers all along... And now India is going into that phase of having a demographic dividend and then Africa will go into that phase around 2050 or something.”

The boomer generation's passage through the system coincided with forced savings (pension contributions) during their working years, which inflated asset prices, and this is now reversing as boomers retire and begin withdrawing, which should create headwinds for asset appreciation.

“Do you think the demographic effect that we've seen where we saw a big generation, the boomer generation sort of move through the system and then also where you saw the formation of pension systems where you essentially had sort of forced saving of this big cohort move through the system. Do you think you talk about inflation, right?”

France's political crisis over raising the retirement age from ~62 to higher levels, and similar crises across Europe, reflect the impossibility of politically implementing necessary demographic adjustments.

“So is this something that can already explain partially what we've seen in France, which has relatively good demographics actually compared to many East Asian countries, and yet has found itself in a massive political crisis for the last couple of years because they just weren't able to raise the retirement age above like what is it 62 or 64 or something like that, right?”

Asset price downturns can be rapid and severe when momentum reverses, even if the underlying fundamental change (like demographics) was predictable over a decade.

“when things change, you can get the downside being much quicker, much faster and much worse. But the problem is that... Now you start short selling now and you can get wiped out before the markets turn. And you may be correct five years ahead, but if you were incorrect over the next two years, short selling would be a disaster.”

Rising inequality and economic stagnation are both feeding populism through different mechanisms: inequality makes people feel relatively deprived, while stagnation creates zero-sum politics and intergenerational conflict as resources become scarce.

“I've now seen also a couple of economists saying, look, what's also feeding into populism is economic stagnation. then you get zero-sum politics. But demographics are feeding into economic stagnation and zero-sum politics, potentially even between generations.”

Asset prices (stocks, real estate) relative to incomes are at or near all-time highs due to decades of low interest rates, making them unlikely to continue supporting pension systems as they did in the 1980–2020 period.

“with the fertility rate being so low... very low interest rates, particularly for so many years. We've had a huge increase in the upsurge in the value of assets, equity assets, which have obviously helped to pay for pensions. But the value of equity assets and the value of houses relative to incomes is now pretty much at an all-time high.”

China's economy is currently rebalancing through massive export surges despite U.S. tariffs, but this is unsustainable and will not provide a durable growth model.

“at the moment the Chinese economy is being balanced by this incredible surge in their exports despite the American tariffs. And we don't think that that is likely to continue. and maybe in the short run, but in the longer run, it's not a way, I think, of balancing the Chinese economy that is sustainable or will last.”