Falling birth rates raise the prospect of a sharp decline in living standards

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Many of the world’s richest countries will need at least a doubling of productivity growth to maintain historic improvements in living standards amid a sharp decline in their birth rates.

A McKinsey report investigating the economic impact of falling birth rates found that the UK, Germany, Japan and the US would all have to see productivity double over the past decade to sustain growth. the same quality of life witnessed in the 1990s.

A consultancy report, published on Wednesday, showed that to keep up with GDP per capita growth between 1997 and 2023, productivity growth in France and Italy would need to triple over the next three decades. . In Spain, it will need to increase four times between now and 2050.

The report highlights the severe impact of declining birth rates on the world’s most prosperous economies, leaving them vulnerable to a shrinking working-age population.

Without action, “young people will inherit low economic growth and bear the costs of many retirees, as the normal flow of wealth between generations is disrupted,” said Chris Bradley, director of the McKinsey Global Institute.

Governments around the world are struggling to contain demographic problems amid rising housing and childcare costs, as well as social factors such as a decline in young people entering into relationships.

Two out of three people now live in countries with birth rates per woman below the so-called “replacement rate” of 2.1, while populations are already declining in several member states. OECD – including Japan, Italy and Greece – as well as China and many in the middle. and eastern European countries.

“Our current economic systems and social contracts have developed over decades of a growing population, especially the working-age population that drives economic growth and supports and sustains people. they live longer,” Bradley said. “This number no longer exists.”

Bradley, who wrote Wednesday’s report, said there is no “single lever to fix” the population crisis.

“It’s going to have to be a combination of getting more young people into jobs, longer working lives, and hopefully productivity,” he said.

The report follows similar warnings from the Paris-based OECD, which last year said declining birth rates put “the success of future generations at risk” and urged governments to prepare for a “low fertility future “.

McKinsey has calculated that in Western Europe, the decline in the number of people of working age could reduce GDP per person during the next quarter of a century by an average of $10,000 per person.

While some economists believe that artificial intelligence and robotics can improve productivity, there is little sign of that happening in a meaningful way. Production across Europe has fallen sharply since the pandemic, widening the gap that has opened with the US since the financial crisis.

The expert argued that many countries would have to encourage people to work longer, following the example of Japan, where the number of people aged 65 and over is 26 percent, compared to 19 of the US and 4 percent. cent in France.

Despite a longer working life, Japan’s GDP per capita has grown at more than a third of America’s rate over the past 25 years.

“The demographic drag is both subtle and deep, and when it comes, increasing productivity growth becomes even more important,” the report said.

The expert estimated that to keep living standards rising at the same rate, the German worker would have to work an additional 5.2 hours per week or the labor force would need to increase by 10 percent from at the current level of about 80. percent among people aged 15 to 64.

The UK and the US needed a lower level of overemployment due to positive demographic prospects, but Spain and Italy would also need to increase the labor force share with numbers two.