Hopes the world economy can grow itself out of the mountain of debt being accumulated during this year’s pandemic shock may have failed to factor in the uncomfortable prospect of a peaking population within the next 50 years.
The sweeping Covid-19 pandemic, related lockdowns and resulting historic recessions have forced governments and companies around the world to borrow to bridge the gap, and left central banks with little choice but to keep debt servicing levels affordable.
The International Monetary Fund in June estimated public debt as a share of gross domestic product in advanced economies on aggregate will now shoot to record highs above 130 per cent this year and next, topping levels seen shortly after World War Two.
Even by the end of the first quarter of 2020, the pandemic-related scramble for credit had pushed total government, corporate and household debt more than 10 percentage points higher to a record 331 per cent of GDP, or some $258 trillion, according to data published by the Institute of International Finance. The figure for so-called “mature markets” is as high as 392 per cent.
The IIF also points out that due to Covid-19-related lockdowns corporate debt has soared, with $4.6 trillion of bonds sold in the second quarter alone compared with quarterly averages last year of $2.8 trillion.
With the United States Treasury conducting record sized 10- and 30-year bond auctions this week alone, no one’s in any doubt there is a lot of debt piling up.
The U.S. Congressional Budget Office in May updated its long-range forecasts for government debt held by the public and reckoned that at $116 trillion by 2050, the public debt ratio was set to more double to 180 per cent by then.
Deutsche Bank meanwhile notes that the “central scenario” of Britain’s official fiscal watchdog shows a 2070 government debt/GDP ratio of 418 per cent. During the austerity drive just five years ago, that same 2070 forecast was just 87 per cent.
“It’s almost inconceivable that we’ll reach that point, so something will likely have to give,” said Deutsche strategist Jim Reid, opining on options from cutbacks to age-related pension and healthcare costs, to higher taxes, faster inflation, central bank bond buying or even – whisper it – default.
“Economic growth could bail us out but this will be tough given demographics.”
Those long-run debt projections just collided with some equally alarming population statistics.
A new academic study of global fertility rates and their long-term demographic implications published in Britain’s The Lancet magazine last month showed the global population is now set to peak at 9.7 billion around 2064 before falling by more than 9 per cent by the end of the century.
While that may be a relief for the environment, it has seismic economic growth and public debt implications.
Populations in some 23 of the 195 countries in the study – including Japan, Spain, Portugal, Thailand and Ukraine – are expected to halve by the end of the century and China could see a drop of 48 per cent. Another 33 countries are seen declining by between 25 per cent and 50 per cent. Both China and India should expect to see their numbers peak before 2050.
Add in ageing in countries forecast to see 25 per cent population declines and the ratio of those over 80 to those under 15 is expected to balloon to 1.5 from just 0.16 now.
“These population shifts have economic and fiscal consequences that will be extremely challenging,” the study said. “All other things being equal, the decline in the numbers of working-aged adults alone will reduce GDP growth rates.”
Of course, relative changes between countries are crucial.
Flattered by immigration, the population of the United States is expected to grow until mid-century followed by a moderate decline of less than 10 per cent of the peak by 2100. In terms of GDP rankings, that would see China rise to the top by 2035 but be superseded once more by the United States in 2098.
For the United States at least, where some argue a mini-youth boom is already underway, the near-term debt situation is workable as long as the Federal Reserve keeps the cost down.
“The math is not that challenging,” said Barings strategist Christopher Smart, adding that if net borrowing costs can be capped at 1.5 per cent, then just 1.5 per cent GDP growth and 2 per cent inflation could see the debt ratio shrink by 2 per cent a year.
More worrying, he said, is the long-term willingness to pay.
And if that becomes a concern in the biggest economy in the world with a relatively manageable debt scenario, not to mention the ability to print the world’s dominant reserve currency, then there is an even bigger headache elsewhere.
The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own.