Investing.com — A declining working age inhabitants, as soon as considered 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 vital concern. However simply how huge of an issue is Europe’s declining working age inhabitants?
“The working age population in the euro area is projected to fall by 6.4% by 2040,” Morgan Stanley in its Way forward for Europe Bluepaper revealed 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, notably when coupled with a growing old 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 probably 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 growing old populations and declining start charges, can provide a window into this downside and useful perception into how efficient, or not, the options have proved alongside the best way.
Japan has carried out a myriad insurance policies to deal with its demographic challenges, together with efforts to extend feminine labor power participation, increase the retirement age, and cautiously divulge heart’s contents to extra immigration.
These measures, nevertheless, have had restricted success, as cultural norms and financial pressures proceed to discourage increased start charges.
For the previous three many years, Japan’s fertility price has been under 1.5, and the latest statistics in 2022 recorded the bottom stage, 1.26, in response to information from the Middle for Strategic and Worldwide Research.
Nonetheless, Europe’s hopes for addressing these demographic headwind could contain a mixture of the insurance policies carried out within the East, Morgan Stanley stated.
Turning to coverage to cushion financial blow from demographic disaster
Three potential coverage choices may counteract these headwinds in Europe: rising internet migration, elevating the efficient retirement age, and shutting the hole between female and male labor power 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 response to 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 greatest impact from increased net migration, while Italy, could benefit most from closing the gender participation gap in the workforce,” Morgan Stanley stated.
Growing internet 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 power participation charges may even have a big affect, doubtlessly rising euro space GDP by 2.5% by 2040, Morgan Stanley estimates. Italy, which has a male vs. feminine labor power participation 8% under the euro space common, may see significant will increase in its labour power if it have been to scale back this hole.
Elevating the efficient retirement age by one 12 months 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 under the European common, stand out because the nations that may 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 corporations’ long-term earnings development from 5.1% to 4.2% by 2030.
This theme is already rising a scorching subject of dialog in European C-suite commentary, with quarterly transcripts displaying a notable rise in mentions of “aging population,” particularly in comparison with US corporations, 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 “could potentially offset some negative impacts,” Morgan Stanley stated.
The productiveness increase from widespread use of AI and automation instruments is more likely to change into extra evident as corporations start to see the fruits of their AI investments and adoption efforts as quickly as subsequent 12 months.
“2024 is the year of AI investment and adoption; in 2025, we think corporate gains should be more evident,” Morgan Stanley stated.
Automation can even have an rising position 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, for example, was simply over 1,000 per 10,000 individuals 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 search out options that may mitigate its financial toll and guarantee sustainable development within the many years to return. Whereas the experiences of Japan and South Korea provide useful 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 deal with its declining working-age inhabitants. Whereas insurance policies geared toward rising migration, lifting the statutory retirement age, rising 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 guaranteeing they align with societal values and financial objectives.