Investing.com — A declining working age inhabitants, as soon as regarded as remoted to the East the place Japan and South Korea have fought the financial toll of a diminishing labor pool for many years, has now washed up on Europe’s shores, inflicting important concern. However simply how massive of an issue is Europe’s declining working age inhabitants?
“The working age inhabitants within the euro space is projected to fall by 6.4% by 2040,” Morgan Stanley in its Way forward for Europe Bluepaper printed Oct. 9, estimating a 4% hit to euro space GDP by 2040.
As a rustic or area’s working age inhabitants declines, there are fewer people contributing to its financial output and productiveness, marking a blow to GDP, or gross home output, significantly when coupled with a getting older inhabitants.
However some euro-area nations are more likely to really feel extra ache than others: Italy, with a working age inhabitants anticipated to shrink by as a lot as 10% between 2025 and 2040, faces the steepest challenges. Whereas France, given its comparatively stronger demographic outlook, would seemingly be the least affected amongst main economies.
Classes from Asia: Japan and South Korea
The demographic disaster in Europe is not a brand new phenomenon. Japan and South Korea have confronted these challenges for many years. These Asian economies, which have been on the sharp finish of coping with getting older populations and declining start charges, can provide a window into this downside and precious perception into how efficient, or not, the options have proved alongside the best way.
Japan has applied a myriad insurance policies to handle its demographic challenges, together with efforts to extend feminine labor pressure participation, increase the retirement age, and cautiously speak in confidence to extra immigration.
These measures, nevertheless, have had restricted success, as cultural norms and financial pressures proceed to discourage greater start charges.
For the previous three a long time, Japan’s fertility fee has been beneath 1.5, and the latest statistics in 2022 recorded the bottom stage, 1.26, in accordance with knowledge from the Heart for Strategic and Worldwide Research.
Nonetheless, Europe’s hopes for addressing these demographic headwind could contain a mixture of the insurance policies applied within the East, Morgan Stanley mentioned.
Turning to coverage to cushion financial blow from demographic disaster
Three potential coverage choices may counteract these headwinds in Europe: growing web migration, elevating the efficient retirement age, and shutting the hole between female and male labor pressure participation charges.
These insurance policies may add between 1.3% and a pair of.5% to baseline GDP for the euro space by 2040, in accordance with Morgan Stanley’s state of affairs modelling. However the diploma of success of those insurance policies in addressing the demographic downside will range from nation to nation as some could have a head begin having pursued these insurance policies early than others.
Germany, the UK, and Spain, would “see the best affect from elevated web migration, whereas Italy, may benefit most from closing the gender participation hole within the workforce,” Morgan Stanley mentioned.
Growing web migration by one customary deviation relative to every nation’s historic ranges may increase euro space GDP by 1.8% by 2040.
Closing the hole between female and male labor pressure participation charges may even have a big affect, doubtlessly growing euro space GDP by 2.5% by 2040, Morgan Stanley estimates. Italy, which has a male vs. feminine labor pressure participation 8% beneath the euro space common, may see significant will increase in its labour pressure if it had been to cut back this hole.
Elevating the efficient retirement age by one yr may improve euro space GDP by 1.3% by 2040. France and Spain, the place the efficient retirement age stays 2 years to three years beneath the European common, stand out because the nations that might profit most from this coverage.
Earnings development within the crosshairs
This demographic problem is already impacting European company outlooks. And if allowed to exacerbate with out coverage motion, Morgan Stanley estimates, may decrease firms’ long-term earnings development from 5.1% to 4.2% by 2030.
This theme is already rising a sizzling matter of dialog in European C-suite commentary, with quarterly transcripts displaying a notable rise in mentions of “getting older inhabitants,” particularly in comparison with US firms, it added.
AI, automation to the Rescue?
The estimated hit to company earnings in Europe, nevertheless, assumes no improve in margins or beneficial properties in productiveness from AI or automation, which “may doubtlessly offset some unfavorable impacts,” Morgan Stanley mentioned.
The productiveness increase from widespread use of AI and automation instruments is more likely to develop into extra evident as firms start to see the fruits of their AI investments and adoption efforts as quickly as subsequent yr.
“2024 is the yr of AI funding and adoption; in 2025, we expect company beneficial properties ought to be extra evident,” Morgan Stanley mentioned.
Automation will even have an growing function to play to plug the productiveness hole from a decline within the working age in Europe, which is comparatively under-penetrated by automation applied sciences.
Industrial robotic density in South Korea, as an illustration, was simply over 1,000 per 10,000 folks employed within the manufacturing in 2022, in contrast with lower than half that quantity in Germany.
A name for motion to safeguard Europe’s financial future
As Europe grapples with this demographic shift, the race is on to seek out options that may mitigate its financial toll and guarantee sustainable development within the a long time to come back. Whereas the experiences of Japan and South Korea provide precious classes; Europe might want to tailor its strategy to its distinctive social, political, and financial panorama.
The problem is obvious: Europe should implement efficient insurance policies that handle its declining working-age inhabitants. Whereas insurance policies geared toward growing migration, lifting the statutory retirement age, growing feminine workforce participation will assist cushion the affect, Europe should embrace technological developments together with AI and automation to assist bridge the productiveness hole.
The important thing to efficiently counteracting the affect on development and safeguarding Europe’s financial future requires successfully implementing these methods whereas making certain they align with societal values and financial targets.