By Chartered Banker, UK

The world’s population was projected to reach eight billion on 15 November 2022 – more than three times larger than it was in 1950. And based on current trends, the estimates the population could grow to about 8.5 billion by 2030 and 9.7 billion by 2050.

The pace of growth is, however, slowing – with projections suggesting that a peak of about 10.4 billion people will be reached in the 2080s.

The largest increases in population took place in the early 1960s, but the pace of growth has slowed as fertility levels decreased with the greater availability of contraception and as countries developed their economies. Increased levels of education, especially among girls, and more job opportunities for women have also played key roles.

On average, women are now giving birth twice, rather than five times, as they were in 1950. Figures vary across regions, however. In sub-Saharan Africa, women are giving birth more than four times and in the Pacific region, or Oceania (excluding Australia and New Zealand), three times. The result of this is that the populations of 61 countries are expected to drop by at least 1% between now and 2050.

Many Asian countries, meanwhile, have rapidly ageing populations. Japan leads the pack with nearly 30% of its population now over the age of 65 and some other nations in the region are not far behind. And at fewer than 800,000, Japan had record low births last year. South Korea, meanwhile, broke its own record for the world’s lowest fertility rate, with the average number of babies expected per woman falling to 0.78.

Here, we examine what these trends mean for economies, banks and their future plans.

Inexorable, Powerful and Scary

Author and former economic consultant Russell Jones says: “I’m always of the opinion that demography is one of those things that never gets the attention it should do because it’s such a slow moving process. It’s inexorable and powerful, but it doesn’t really fit into the five-year or four-year time frame of the electoral cycle. We had this great post-war boom, which was built on very rapid population growth after the Second World War. But nobody ever really mentioned it unless they had to.

“Now we’re starting to see a lot of the opposite problems coming through and some of the numbers are really scary. I think the UK is okay by most standards, but in some countries – Japan, South Korea, Germany and Italy – it’s really frightening. They’re confronted by significant declines in their overall population, but we’re all going to have to deal with the fact that the economy won’t grow as fast and that we’re going to have a huge number of people that we have to look after. And I think that in the next 40 or 50 years, we’ll see some dramatic changes in societies, especially if we put climate change on top of that. It’s a whole new ballgame.”

Nasty Spiral

Jones believes that there is a vicious cycle at play. “As we grow more slowly, which we’ve been doing for some time, the amount of wealth that people can expect during the course of their lifetime declines, and then their willingness to have children is reduced. And then as the willingness to have children falls, economic growth falls. You get into a nasty spiral. I think that’s something that is definitely affecting a lot of countries, certainly in Japan and South Korea.

There are, according to Jones, two factors that make economies grow. “One is how many hours are being worked,” he says, “and that’s very much dictated by how many people a company employs, and second, how productive they are. And we’re losing one engine in its entirety as populations stop growing and even start declining. So, all the focus is now on raising productivity to enable growth. And we’re not really doing a terribly good job of that anywhere, never mind in the UK. Productivity growth has fallen, in fact, so the way out is through quite a complex series of policies.”

What needs to be done then? Jones suggests: “We have to take steps to promote the employment and the skills of the elderly. We have to include more women in the workforce or encourage doing so. We need more money and more migrants. But more than that, we have to design our pension schemes better.

“Every government is going to have to spend a lot more on pensions, social care and long-life care. And every government is going to have to tax more to fund that if they’re going to make the numbers add up. Politically, that’s a tough sell, especially to any right-wing political party. We’re still hearing Tories saying that they want to cut taxes, which is madness. The only direction for taxes and public spending is upwards over the longer term.”

Urban Shift and Intergenerational Inequality

Dimitri Zenghelis, Visiting Senior Fellow, London School of Economics and Political Science, looks at the issue of shifting demographics from a slightly different point of view. “What all countries share – especially the ones where populations are growing, but also the ones where they’re declining – is that they’re still urbanising,” he points out. “This doesn’t necessarily mean that the density of populations is going down. People are, in general, moving into cities across the world. So, from the perspective of banks, whether big tracts of countryside are emptying out is probably not that material. What matters more is how many people live in urban centres and how many people live in dense proximity to branches.”

Like Jones, Zenghelis stresses that we’re dealing with long time periods. “Population decline is a very slow secular change,” he says. “It’s also key to remember that while populations are going down, people are, in fact, living longer. That means that even if the total replacement fertility rate is low, it will take a while for populations to actually decrease because people are alive for a bit longer.

“Another part of the problem is the fact that the older people have the wealth and younger people have to wait for the older people to transfer it to them. And that’s causing intergenerational inequality. That will probably change the nature of what banks do, in particular when it comes to savings products.”

He questions whether we might see a change in the demand for banks. “I suppose the big question is do we still require banks, or do we need to disintermediate to financial services and fintech? Perhaps we don’t need them at all?”

He points out that banks rely on a critical mass. “They’re a contract, but they’re a contract that works so long as enough people are confident in it, but as soon as the depositor base starts to thin out, then we have problems. We’re currently seeing this in the US.

“The cost-of-living crisis won’t be a long-term thing, it’s short term,” he continues. “But when we see crises like this, banks can become very vulnerable, especially after years of low interest rates and overleveraged, overstretched financial institutions. Then add into the equation corporations and individuals that may start not repaying their debt.”

Women, Work and Marriage

Finally, but importantly, Zenghelis examines the way that women and work have impacted the financial services sector. “A lot more women are obviously working and entering the formal economy today. And as societies mature, the informal economy is disintermediated because there’s a lot of activity at home that wasn’t paid for in a traditional model.

“Now, increasingly and rightly, women are working. And many of these services that weren’t paid for are monetised because people are brought in to take over the childcare and the cleaning etc, meaning there’s more formalised money in circulation, and more GDP (gross domestic product) as well. That doesn’t affect the banking system particularly, but the amount of money circulating through formal structures will, perhaps quite substantially, offset a lot of the issues around changing demographics because more people in the formal economy will need bank accounts.

“We also have fewer married couples, and fewer women having children probably means more women working. These are really important and powerful points because the demographic changes in terms of population are probably much slower in many societies than the demographic changes in terms of working and marriage habits.”

This article previously appeared in the Chartered Banker magazine, UK, Summer 2023 edition.