Demographics are a key driver of long-term macro trends. The link between changing demographics and wealth has significant implications for asset markets given stark differences in ageing across countries. In this Deep Dive, we review a joint paper recently published by Stanford, Northwestern, and Minnesota which looks at age distribution and behavioural shifts to determine the impact on wealth-to-GDP ratios across countries.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Demographics are a key driver of long-term macro trends. The link between changing demographics and wealth has significant implications for asset markets given stark differences in ageing across countries. In this Deep Dive, we review a joint paper recently published by Stanford, Northwestern, and Minnesota which looks at age distribution and behavioural shifts to determine the impact on wealth-to-GDP ratios across countries.
Background
The focus of the paper is on how changes in demographics, like ageing, affect a country’s wealth-to-GDP ratio and in turn, how that affects other economic variables. They identify two key effects – compositional one, where a change in the age distribution affects wealth-to-GDP and a behavioural one, where variations within age profiles affect asset ownership.
The authors find that of the two effects, the compositional effect is the more important driver of wealth-to-GDP. The compositional effect can be further broken down into two causes: population shifts towards ages that have higher asset holdings; and population shifts towards ages that have lower labour supply.
Chart 1: Compositional effects on wealth-to-GDP
From 1960 to 2016, US demographics showed an increase of approximatively 120pp in the compositional effect, which broadly matches the wealth-to-GDP ratio (dashed line, Chart 1 – Fig 2 in situ). Furthermore, depending on fertility rates, wealth would increase by over 200pp (low fertility) or 50pp (high fertility).
Chart 2: Effects of demographic composition on wealth and income
Breaking down the compositional effect, between 1950 to 2016, the biggest contributor to the increase in the wealth-to-GDP ratio has been ageing (Chart 2 – panel A). But countering that has been the demographic dividend, which boosted the working-age population and productivity, and so increased income and GDP (Chart 2 – Panel B). But this dividend has likely peaked in 2016. So the income effect would now work to increase the wealth to GDP ratio as more people fall into retirement and out of their peak 40 to 60 earning years. This pulls down GDP/income relative to wealth and raises the wealth-to-GDP ratio. Meanwhile, wealth accumulation falls very late in life, usually after the age of 80-85, as opposed to income which falls right after retirement.
Rest Of The World
The authors apply the same approach to other countries. Rising wealth-to-GDP has been seen across all developed countries. But, they also see significant cross-country differences (Chart 3). The smallest effect is in Hungary where the compositional effect is 38pp by 2100, and the largest ones are in India and China with 278pp and 305pp, respectively, also by 2100. The authors also state that, ‘in general, the compositional effect is projected to be smaller in developed economies, since their demographic transition is mostly past them, and bigger in developing economies whose demographic transition is still ahead of them’.
What the researchers also establish is that age profiles of assets and labour supply do not differ too much across countries. So, we have those two emerging macro stylised facts saying firstly that assets always peak later than income, and secondly that assets don’t decline as sharply as income.
Chart 3: Compositional effects globally
Impact On Global Imbalances – Net Foreign Assets
The authors also look at the implications of demographic shifts on real interest rates and country’s net foreign asset positions (NFA). They find the strongest results for NFA, where shifts in demographics (ageing) appear to be most closely correlated to NFA (Chart 6). Meanwhile, their projections would suggest that countries like India could see the largest increases in NFA in coming decades (Chart 7)
Chart 6 – Historic changes in demographics and NFA
Chart 7 – projected changes in demographics and NFA
Bottom Line
The power of ageing to determine wealth and NFA positions provides an important guide for future shifts in global savings. A gradual rotation in wealth ratios away from advanced economies and towards younger emerging market economies will open up future opportunities in asset markets and have implications for long-term trends in currency performance.
Stefan Posea is a Research Analyst at Macro Hive. His research interests lie in macro-financial interactions and monetary policy analysis. Stefan graduated with an MSc in Economics at Birkbeck, University of London and previously held roles in M&A and the Public Sector.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)