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Author: Blu Putnam, CME Group

AT A GLANCE
· China’s economic growth projected to stall on slowed urban-to-rural migration and a rapidly aging population.
· Low birth rates, low immigration and longer life spans all contribute to an increase in the non-working population.

Most economists are well aware of the influence of demographics on long-term economic patterns. Unfortunately, in this “what have you done for me lately” world with the focus on the next second, day, month or quarter, changes in demographics may seem to come at a snail’s pace and often get lost, ignored or forgotten. Well, be wary. The 2020s and 2030s portend major changes in economic activity due to demographic influences.

China will be the poster child.

An Aging Population
The Chinese population is aging rapidly, a fact once accelerated by the one child policy. But even now that the policy has been rescinded, the birth rate in China still remains exceptionally low. What does this mean for economic activity?

Rural to Urban Migration
The arithmetic of real GDP is that growth is determined by labor productivity and labor force increases.

The largest gain in labor productivity for most developing economies occurs during a period when there is a major migration of the working age population from lower productivity rural areas to higher productivity urban centers. This was true for the U.S. in the 1800s, Japan in the 1950s, the Soviet Union in the 1960s, and China in the early 2000s. The highest real GDP growth rates per decade are typically recorded in these periods of rural to urban migration.

Once the rural to urban migration slows, economic growth depends more on increases in the working age labor force. Low birth rates, low immigration and longer life spans all contribute to an increase in the non-working population relative to a very slow or no longer growing labor force.

Shifting Demographic Headwinds
Japanese growth peaked in the 1980s and then slowed in the face of demographic headwinds, while U.S. growth has been slowing since the 1990s as its population has aged.

China avoided the economic growth implications of an aging population during the 1990-2010 period due to its massive migration of workers from rural areas to urban areas. This allowed China to record several decades of 10% annual average real GDP growth. The 2020s will see the end of the rural to urban migration, and the full implications of the trend toward an aging population coupled with a low birth rate will kick in.

There is nothing in this demographic analysis that the Chinese leaders do not fully appreciate, which is why they emphasized infrastructure development during the period of the rural-to-urban migration. It was their demographic “window” to lift hundreds of millions out of poverty, and they did. China is now a mature industrial economy with little growth in its urban labor force projected for the 2020s. Economic growth is likely to slow in the face of these strong demographic headwinds.

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