Sovereigns, Corporates




Analytical commentary

Large-scale demographic processes are generally characterized by inertia and a much higher predictability than economic indicators projected over several years. This does not mean, however, that demography as an economic factor is 100% clear-cut and straightforward: effects of population structure changes on a country’s economy and finances are still waiting to be properly studied and interpreted. Partial blame for this can be placed on inadequate economic statistical data due to incomplete comparability (or complete lack of comparability) of most time series for those intervals when demographic indicators went through significant changes.

Admittedly, there are aspects of demography that we understand rather well. For instance, the above mentioned effect on a country’s economy and finances clearly does exist, and is quite considerable. Changes in the size of employable population is an important factor that affects economic development. In most dynamically growing economies throughout modern history, employable populations used to grow rapidly as a result of ebbing infant and child mortality rates and growing active life expectancies. Among major economies over the recent decades, the main beneficiaries of these processes have been Brazil and the countries of Southeast Asia. But demographic dividends do not last forever: thus, China’s employable population (unlike India’s) is already on the verge of decline.

Despite the importance of the demographic factor, the difference between economic growth rates in developing countries and the rest of the world cannot be entirely explained by workforce growth rates. The scale is tipped not by the size of employable population, but by the method and intensity of its use, i.e. labor productivity, which can be increased by accumulating physical and human capitals. Due to its low base effect, such growth is more clearly demonstrated by relatively poorer countries. As a result of globalization, cheap labor has been attracting foreign investments and stimulating catch-up growth on a number of markets across the world. The two countries with populations in excess of one billion (India and China) continue to boost their labor productivity levels, which helps them grow, while in the present day Brazil, for example, the labor force is expanding in the absence of outrunning productivity growth. The rapid growth of the Russian economy in the 2000s cannot be explained by the growth of oil exports alone; rather, it occurred due to the formation and more importantly, re-injection of physical and human capitals into the economy after the crisis-related transformation of the 1990s.

Lately, demographic changes placed in the financial market context have become one of interest-evoking and popular discussion topics. Apparently, in most developed countries, interest rates are experiencing pressure from the two conflicting processes, as outlined below.

On the one hand, interest rates are being affected by the growing life expectancy due to a dropping mortality rate among senior citizens. Quality of life of the elderly is improving at a faster rate than that of the expansion of employable age categories. Therefore, the number of non-productive (or less productive) years in any person’s life grows along with his or her increased life expectancy. With all other things being equal, this means that in order to ensure a comfortable level of consumption after retirement, one would need to save a relatively large portion of their regular income while still employed. This may exert a downward pressure on real interest rates, as credit supply becomes more abundant.

On the other hand, the dropping mortality rates result in the ballooning shares of the elderly in total populations. As retired individuals start digging into their lifetime savings, they typically tend to acquire a higher propensity to spend. By contrast, this pushes credit supply back down and can exert an upward pressure on real interest rates. 

In 2016, several research publications came out that independently agreed on the following: financial markets are currently more affected by the first of the above mentioned processes, which in the developed economies translates into a reduction of average real interest rates (it should be noted that demographic factors were behind about one third of rate reductions in developed countries over the last three decades). Monetary stimuli and interest rates dynamics since 2008 can look as mere oscillations around a steady long-term trend. If research models adequately portray the real state of affairs, demographic factors may again exert upward pressure on global real interest rates.

Conversely, demography is only one of the contributing factors. Situations in Russia and other developing countries are tell-tale evidence to that. In the 2000s, life expectancy in Russia was increasing rapidly, but the share of senior citizens in total population showed almost zero growth. Following the model logic, we could expect real interest rates to drop, but instead we are observing a gradual upward movement. Demographic factors still play only a minor role on the Russian financial market: persistent financial troughs and high inflation discourage people from making retirement savings. However, once our financial market stabilizes, the demographic factor will be moving centerstage.  

Vedomosti, #4231, 23.12.2016

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Natalia Porokhova
Senior Director, Head of Sovereign Ratings and Forecasting Group
+7 (495) 139 04 90
Maria Mukhina
Operating Director
+7 (495) 139 04 80, доб. 107
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