A recent article published in the Financial Analysts Journal examines the relationship between demographics and both economic growth and capital market returns.
The authors—Robert Arnott and Denis Chaves—use a new econometric technique to confirm a strong link between demographic trends and: excess (in excess of returns on domestic cash) stock market returns; excess bond market returns, and; real per capita gross domestic product (GDP).
Ten year forecasts for GDP growth, bond market returns and stock market returns are provided for a couple dozen developed countries.
The results and projections contribute to a perspective that many observers might arrive at by intuition. This view is that aging societies will likely experience lower economic growth and lower stock market returns.
As the authors summarize:
- Children don’t contribute to GDP and they do not help capital market returns.
- Young adults are the engines of GDP growth, but they are not impacting capital market returns.
- Middle-aged adults are the “engines” of capital market returns.
- Seniors or retirees detract from GDP growth as well as stock and bond market returns. As the authors put it: “they disinvest to buy goods and services that they no longer produce.”
The shifting ratio of seniors to young, productive adults in many countries around the world affects the extent to which economies and stock markets may be impacted (bonds are a somewhat different story). The relative potential impact is greatest for those countries with the most severe overhangs of retirees (e.g. Japan).
Source: Financial Analysts Journal
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