Europe’s demographic challenges are turning into a ticking time bomb for the region’s economy, with Morgan Stanley issuing a grim forecast of its effects on GDP.
Morgan Stanley says Europe’s aging population could shrink 4% of Eurozone GDP by 2040 as people live longer and birth rates fall.
The bank predicts a significant loss of GDP by 2040, with Europe’s working-age population forecast to shrink by 6.5%, due to a decline in the number of working-age people producing output and paying taxes.
Italy is expected to be the biggest victim of this decline, as an aging population will reduce the country’s GDP by around 6% over the next 15 years. France and Germany will also experience significant declines, although lower than the EU average.
In countries where hospitality is a bigger driver of the economy, the impacts on GDP are expected to be dramatic, as fewer people fill these roles, while an aging population increases the tax burden.
The only country that will expand thanks to demographic changes is the United Kingdom, according to Morgan Stanley. The country is expected to add four percentage points to its GDP by stabilizing the working-age population. Declining productivity, however, is expected to remain a problem for the UK
How to solve Europe’s population crisis
Western countries are facing a steady decline in their working-age population, a trend that has already taken place in countries such as Japan and South Korea.
It is becoming an increasingly important topic of discussion in European councils. Morgan Stanley combed through more than 300,000 comment transcripts to find that mentions of “population aging” had spiked in recent years, with nearly 5% of C-suites addressing the topic.
However, the options for policy makers to deal with the growing anxiety about this demographic ticking time bomb do not look good.
Morgan Stanley says there are two main options for reversing population decline. The best option, a cool baby boom, is unlikely to happen.
“Even if an effective policy to increase birth rates could be implemented immediately after it existed, it would take more than 15 years for this policy to have an impact on the labor force. Almost no short-term fix,” the authors wrote.
The bank hypothesized that the sudden rise in birth rates in the 2000s, fueled by the advent of IVF treatment, could now be repeated. Although the new growth in IVF was temporary, other policy settings may have helped.
“Recent steps to expand childcare may act as a demographic measure, and the high levels of net migration in recent years may provide some support to fertility rates. That’s why we believe that there is a possibility of at least stopping the decline in fertility rates.’
In fact, reforms to increase net migration are the most appropriate way to combat the decline of the working-age population and, as a result, economic growth.
The issue of immigration has been on the rise in Europe in recent years, and far-right anti-immigration parties have gained strength this year, such as France’s National Rally and Germany’s Alternative for Deutschland (AfD). This has made it difficult for governments to convey the benefits of immigration to voters.
According to Morgan Stanley, the third option to save GDP is not so pleasant is to increase the working hours of the remaining working age population. Raising the retirement age is another option that will likely be unpopular with voters.
The most effective, albeit realistic, combination is greater migration, coupled with increased female participation rates, the bank says. This will be able to address the current projected economic growth gap, increasing GDP by four points.
While fewer working-age people may suggest higher wages for remaining workers, Morgan Stanley notes that the negative GDP impact of population decline will likely have a negative impact on earnings.
The bank’s report outlines a dire obstacle for Europe to overcome one of the most existential challenges of the coming decades. Doing nothing could be disastrous.
