As Western populations age, fewer workers and higher costs will strain public finances, credit rating agency Moody’s has warned.
Europe is at the sharp end of the demographic shift. The European Union’s population is projected to peak as soon as 2029, “after which a sustained long-term decline will begin,” according to the European Commission.
The U.S. Census Bureau does not expect the American population to peak until 2080 under its main projection, or until 2043 under its low-immigration scenario. Excluding immigration impact, the population decline has already started.
But Moody’s says the fiscal pressures from aging emerge long before populations actually start shrinking.
Today, G7 economies have about three working-age people for every person over 65. That ratio is expected to fall to around two by 2050, putting further pressure on growth and public finances, including healthcare systems, according to Moody’s.
Aging populations affect economies through slower economic growth, greater pressure on public finances from pension and care costs, changing consumer demand, and shifts in real interest rates and sovereign yields, Olivier Chemla, vice president of credit strategy and standards at Moody’s, told CNBC’s “Squawk Box Europe” on Friday.
In a report published last week, Moody’s forecasts that the world’s aging populations will have fundamental impacts on the global economy and lead to difficult policy decisions.
While population growth has long been a tailwind for growth and creditworthiness, falling fertility rates and unprecedented speed of changing age structures are now changing that picture, Moody’s writes.
“Fewer workers will limit productive capacity, while fewer households and consumers will weaken demand. As a result, countries will have to rely more on productivity to sustain growth,” the report states.
The AI impact
AI and increased productivity can only partially offset the long-term challenge of an aging workforce, Chemla said.
“This is a partial mitigant because you can certainly replace and enhance the supply side of the economy in factories and in services, but at the same time, robots do not consume – at least not yet – and so on the demand side, you will still be having that gap, which will slow growth,” he added.
And it’s not only Europe and the U.S., but emerging economies are aging rapidly, too. China’s share of people aged 65 and over has doubled from 7% to 14% over the past two decades, with Brazil, Thailand and Turkiye on similar trajectories.
These countries will face the costs of aging at much lower income levels than the advanced economies that aged before them, the report says, noting that in Europe, the same shift took several decades.
