Why ageing has implications on the macroeconomy

Dubai - Emerging markets currently represent two-thirds of the world's elderly

The ageing phenomenon has been a dominant feature of Western economies over the past few decades, but Asian economies will age the most rapidly in the next phase, with China, Thailand, Korea, Singapore and Hong Kong set to age fastest.
In a new special report, Standard Chartered's global research team assesses the policy responses of countries in the region that most urgently need to tackle challenges related to ageing.
It also analyses the timing and impact of ageing on gross domestic product growth and its implication for household savings.
While many advanced economies have a high share of the 65-plus age group in their population, emerging markets currently represent two-thirds of the world's elderly. The United Nations forecasts that the share of those aged 65 and above in emerging markets will rise to almost 80 per cent by 2050. China already has 131 million seniors, more than double the combined older generations of the three most-aged economies in the world - Japan, Italy and Germany.
South Korea and Singapore are set to become "hyper-aged" societies (defined by the UN as those in which seniors make up more than 21 per cent of the population) by 2030; they are already "ageing" (seven to 14 per cent of the population is 65 and above). Thailand and China will become hyper-aged by 2035.
Asia and other emerging-market regions are getting older faster than previously has been seen. It will take China and Singapore 25 years to progress from an ageing society to an aged society, according to UN projections. By comparison, it took the UK 45 years, the US 69 years and France 115 years.
The acceleration of ageing means some societies will get old before they reach high-income status. This could create challenges, including limiting their ability to move up from middle-income status. Thailand and China are likely to face this challenge in the next few decades. The macroeconomic impacts of ageing on an economy are varied, the most direct and significant of which is through labour supply. Standard Chartered estimates that after decades of positive contributions to GDP growth, demographics will become a drag by 2020 for China, Korea, Hong Kong and Thailand and by 2025 for Singapore.
Standard Chartered estimates that growth in China's labour force contributed more than 1.5 percentage point to GDP growth on average between 1996 and 2000, and over three percentage points in the early 1980s. By 2030, based on current demographic trends, the shrinking of the labour force will reduce GDP by 0.25 percentage point. However, the report shows that modest improvements in the quality of labour can delay the impact of ageing on GDP growth. For example, the negative effect for China could be postponed by 10 years.
Equally, on the positive side, the senior consumer market in emerging economies has considerable growth potential, leading to estimates that spending by the 65-plus age group in some major emerging markets (including the Brics along with Indonesia, Malaysia, the Philippines, Mexico, South Africa and Turkey) could increase by more than 400 per cent to $4.4 trillion in 2030 from $800 billion in 2015.
Samantha Amerasinghe, economist on thematic research, said: "The next phase of global ageing will be driven by rapid ageing in key Asian economies. The speed of Asia's demographic transition is a major concern as it means that many countries in the region risk growing old before they get rich. While governments in Asia have undertaken many reforms to tackle the challenges of a rapidly ageing demographic, their continued attention to balancing its negative effects alongside the positive aspects of rising personal consumption amongst the "silver economy" over the longer term will prove crucial."
Demographic trends are challenging Asia's traditional family values system. China is facing a "4-2-1" phenomenon, whereby an only child is responsible for two parents and four grandparents.
Institutional support is not yet in place to respond to the rapid rise in ageing. Pension systems remain unsustainable despite recent policy reforms. In China, the nationwide pension system may run a deficit as early as 2030; Thailand will likely run a deficit from 2041. By then, the pension systems in Korea and Vietnam should also run small deficits.
Policies to raise fertility rates have been widely adopted in Asia to tackle the effects of ageing. They have so far proven unsuccessful. Fertility rates for the major economies - including China, Thailand, Japan, Singapore and Korea - remain well below the population replacement rate of 2.1.
Initiatives to raise female labour participation are likely to have the largest immediate impact in offsetting the drag on labour-force and GDP growth from ageing. Child-care provision in places like Japan and Korea has had a positive effect, but their impact has generally been modest, hampered by entrenched social norms.
Measures to upgrade seniors' skills are prevalent only in advanced Asian economies such as Korea, Japan and Singapore.
- busin