A recently released paper called The Wealth of Working Nations found that, after controlling for working-age population (i.e. those age 15-64), historical GDP growth is quite similar across most developed countries. But, this got me thinking, “How much do demographics impact the stock market?”
With the Baby Boomers continuing to retire in the U.S. and population growth slowing throughout most of the developed world, will this spell disaster for future stock returns? This isn’t a simple question to answer.
For years, researchers have debated the impact of population trends on economic growth and market performance. Some have argued that demographics are the hidden force behind long-term market trends. However, others believe that other factors such as productivity growth play a far larger role.
In this post, I will explore this relationship in more detail to see whether population really holds the key to economic growth and future stock returns. Let’s dig in.
Does Population Predict GDP Growth?
When it comes to population growth and GDP growth, there is some evidence that they are positively correlated, at least within developing countries. The Federal Reserve released a note in September 2016 which concluded that, “demographic changes account for a significant portion of growth slowdown in several of these [OECD] economies in recent years.”
Looking at GDP growth and population changes over time makes this more apparent. For example, from The Wealth of Working Nations paper, you can see how GDP has changed in a handful of advanced economies since 1991:
What you may notice is that countries like Italy and Japan have had worse GDP growth than countries like the U.S. and Canada. This has occurred for a multitude of reasons, but one of them is related to changes in working-age population.
When we look at the changes in their working populations, there are
