Europe’s demographic challenges are becoming a ticking time bomb for the region’s economy, with Morgan Stanley offering a grim prediction for its effects on GDP.
Morgan Stanley says Europe’s aging population could shave 4% of eurozone GDP by 2040 as people live longer and birth rates fall.
The bank projects a significant loss of GDP based on forecasts that Europe’s working-age population will shrink by 6.5% by 2040 due to a reduction in the number of working-age people producing and paying taxes .
Italy is expected to be the biggest victim of this decline, with an aging population cutting about 6% of the country’s GDP over the next 15 years. France and Germany will also see steep declines, albeit less than the EU average.
In countries where hospitality is a bigger driver of the economy, the impact on GDP is expected to be exaggerated as fewer people fill these roles while an aging population increases the tax burden.
The only country that will expand due to demographic changes is the UK, says Morgan Stanley. The country is expected to add four percentage points of GDP by stabilizing the working-age population. Falling productivity, however, is expected to remain a problem for the UK
How to fix Europe’s population crisis
Western countries are facing a steady decline in their working-age population, a trend that has already been seen in countries such as Japan and South Korea.
This is increasingly becoming a hot topic of conversation in boardrooms across Europe. Morgan Stanley sifted through more than 300,000 transcripts of comments to find that mentions of the “aging population” have seen a sharp rise in recent years, with nearly 5 percent of the C-suite bringing up the topic.
The options available to policymakers to address the growing anxiety about this demographic time bomb, however, do not look good.
Morgan Stanley says there are two main options to counter declining populations. The most preferred option, a fresh baby boom, is unlikely to occur.
“Even if there was an effective policy to increase the birth rate and it could be implemented immediately, it would take more than 15 years for this policy to have an impact on the labor force. Hardly a short-term fix,” the authors wrote.
The bank hypothesized whether a sharp rise in the birth rate in the 2000s, driven by the advent of IVF treatment, could be replicated now. While the fresh increase in IVF was a one-off, other policy implementations can help.
“Recent steps to expand childcare may act as a demographic measure, and high levels of net migration in recent years may provide some support to fertility rates. So we think there is room for fertility rates to at least stop falling.”
Indeed, reforms to increase net migration are the most likely way to address a decline in the working-age population and, consequently, economic growth.
The topic of immigration has erupted in Europe in recent years, with far-right, anti-immigration parties gaining significant ground this year, such as France’s National Rally and Germany’s Alternative for Deutschland (AfD). This has made it harder for governments to deliver the benefits of immigration to voters.
A third, far less palatable option for saving GDP, says Morgan Stanley, is for the remaining working-age population to increase their working hours. Raising the retirement age is another option that could be unpopular with voters.
The most effective, though still realistic, combination is higher migration combined with increased female labor force participation, the bank says. This could address the current projected economic growth gap by increasing GDP by four percentage points.
While fewer people of working age could suggest higher wages for workers who remain, Morgan Stanley points out that the negative GDP effects of the declining population will likely have a negative impact on earnings.
The bank’s report presents a bleak set of obstacles for Europe to overcome one of its most existential challenges in the coming decades. Doing nothing could be disastrous.
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