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Changing Demographics And Deflation

After six years of "easy" monetary policy by fed, monetary stimulus by Japan- Abenomics, QE by European central banks and now China's accommodative policy, why is there such a low inflation around the world? Even more perplexing is why central banks around the world have resorted to printing money to stimulate growth? Is the problem more structural than we think? I believe so ... and I am of the opinion that answers can be found in global demographics.

The world is currently at a median age of 30.2 years and is projected to be 38.4 years old by 2050. In my opinion, this aging of the world is creating a deflationary pressure around the globe. Aging is having a more profound effects on developed economies as they are in a more mature age cycle than compared to some emerging economies.

Below is the chart of median age across some regions and countries:

Median Age

 

2000

2015

2025

2050

World

26.6

30.2

32.8

38.4

Japan

39.6

46.6

50.6

55.1

Europe

37.5

41.5

44

46.6

USA

35.3

37.7

38.9

40.6

China

29.6

35.6

38.9

45.2

India

23

26.9

29.9

46.6

Africa

18.5

20.4

22.2

28.5

It's worth noting that regions and countries with older population are experiencing low inflation and are currently pursuing more accommodative monetary policy. For example, Japan currently has one of the most aged population in the world at 46.6 years old and is projected to be 55.1 years old by 2050. Aging of population by its very nature create deflationary pressure in the economy. Older citizens are likely to reduce expenses, downsize, require social security & healthcare benefits. On the other hand, young adults are likely to spend on education, new house, for kids, cars, technology and other desires, increasing the consumption. Also, troubling is the elderly dependent ratio of Japan which is quiet high and in my opinion will further create more deflationary pressure on the economy.

Same can be said about Europe (second most aged region) and China. However, not all is gloomy. Africa with the current median age of just 20.4 years will/is have a lot of its population entering workforce. When this demographic trend is mixed with right reforms and capital investment can generate tremendous growth. . An able leadership and appropriate capital infusion can turn it to be the next frontier.

India is another bright spot with favorable demographic trend, a government that is stimulating growth and joining hands with international partners to boost trade.

While most of the mature economies are faced with this demographics headwind, a lot can be achieved through constructive reforms. In my opinion, monetary policy has been effective to buy time to implement reform but not much has been achieved thus far to boost productivity. In the meanwhile businesses should double-down on growth and investment opportunities created by demographic tailwind in India and Africa.