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Moody’s warning: the pressure starts before population decline

Aging populations have begun to strain budget balances in Western economies even before total population shrinkage has officially set in. Moody’s said a smaller workforce and rising pension and healthcare spending will place lasting pressure on public finances, with significant implications for the growth outlook and credit quality.

According to the agency, the impact of the demographic shift is not limited to a decline in headcount. A shrinking labor force constrains productive capacity, while fewer households and consumers weaken demand. This leaves countries increasingly dependent on productivity gains to sustain growth.

What do the numbers show?

The European Commission projects that the European Union population will peak as early as 2029 before entering a prolonged period of decline. The U.S. Census Bureau, meanwhile, expects the American population to peak in 2080 in its main scenario, or in 2043 under a low-immigration scenario; excluding the effect of immigration, the decline is said to have already begun.

  • In the G7 economies, there are currently about three working-age people for every person over 65.
  • That ratio is expected to fall to two by 2050, increasing pressure on growth, healthcare systems and public budgets.
  • In China, the share of people aged 65 and over has risen from 7% to 14% over the past two decades; Brazil, Thailand and Turkey are following a similar trend.

Moody’s stressed that population growth supported economic expansion and credit strength for many years, but falling fertility rates and the rapid shift in age structure are reversing that picture.

Market impact: growth, rates and bond yields under pressure

According to the agency, aging will affect economies through slower growth, higher pension and care costs, shifting consumer demand and changes in real interest rates and government bond yields. For that reason, the issue is seen not only as a social policy challenge, but also as a critical factor for financial markets and sovereign borrowing costs.

Productivity gains can only partly ease the strain

Moody’s analyst Olivier Chemla said artificial intelligence and productivity gains may only partly offset the long-term challenge. While automation can support supply in manufacturing and services, weaker consumer numbers will continue to limit growth on the demand side.

According to the report, emerging economies are also aging rapidly. However, they will face similar costs at much lower income levels than advanced economies that went through the same process earlier.

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