Blogposts » An Aging population – The impact on Foreign Trade in Industrialized Countries

An Aging population - The impact on Foreign Trade in Industrialized Countries
What do empiricism and simulation calculations tell us?

An aging population: In the last week, we have shown what theoretical connections can be expected between an ageing society and the current account balance of this country. The question now is which demographically induced effects important industrial nations such as Germany, Japan and the USA can expect in their current account balances by 2050. The corresponding simulation calculations come from a recent study.

Basic methodological approach

The entire analysis can be roughly divided into three stages:

  1. First, the effects that different age groups have had in the past on key macroeconomic variables are estimated (regression analysis).
  2. Then a first hypothetical scenario is calculated until 2050 (“Baseline scenario). In this scenario, the population size and structure remain constant at the level of 2018. In combination with the age-dependent estimates from the regression analyses, it shows how macroeconomic variables would develop if there were no demographic change at all in the coming decades.
  3. Finally, a second scenario is calculated in which the expected population development up to 2050 is combined with the age-dependent estimates from the regression analysis (“Projected Population” scenario). It shows the effects of demographic change on macroeconomic variables.

Basic of calculations

The study refers to highly developed industrial economies. For reasons of limited resources, just seven countries are considered in the simulation calculations until 2050: Germany, Austria, France, Italy, Spain, USA and Japan.

For the regression analysis six additional industrial economies are included in order to obtain a larger data set (Belgium, Denmark, Finland, Netherlands, Sweden, United Kingdom). The regression analysis is based on data from 1980 to 2015.

The study is dealing with a long-term approach based on neoclassical growth theory. Business cycle fluctuations are not taken into account. More details can be found in the long version of the study (see Bertelsmann Stiftung 2019).

Expected demographic development until 2050

First, let us take a brief look at demographic trends up to 2050. For reasons of simplicity, we will only look at three of the seven countries for which we have simulation calculations.

A key factor for the economic development of an economy is the working-age population, defined in this study as persons aged between 15 and 64 years. From an economic point of view, we see the most favourable population development in the USA, where the working-age population will grow by 8.2 percent until 2050. The largest decline in the working-age population is predicted for Japan (minus 29.4 percent, see figure 1).

 

aging population

 

If we combine the results of the regression analysis on age-related macroeconomic development with the population forecasts, we can project the development of the current account balances of the three countries.

German current account balance

In Germany, the demographic effect on the current account balance will become increasingly noticeable from 2030 onwards. Without demographicageing, the current account surplus between 2030 and 2050 would be around 5.7 percent of GDP. However, this surplus will be reduced due to ageing. In 2050 it will only be around 3.4 percent of GDP. Nevertheless, the current account balance is expected to remain positive (see figure 2).

 

aging population

Japanese current account balance

For Japan, simulation calculations show that the current account deficit is lower in the scenario with an ageing population than in the hypothetical scenario with a constant population (see Figure 3). This surprising result can be explained as follows: The current account balance is the difference between macroeconomic savings and investment. If the investment ratio (defined as the ratio of aggregate investment to GDP) falls faster than the savings ratio due to ageing, the current account deficit becomes smaller. This is precisely the case in Japan.

 

aging population

American current account balance

As shown in Figure 1, the working-age population in the USA is growing. To provide these people with jobs, more investment is needed. At the same time, the American population is ageing. As a result, the overall economic savings ratio is falling. If rising investment demand meets falling domestic savings, the increased demand for goods must be satisfied by imports from abroad. The American current account deficit is therefore increasing. In the scenario “Projected Population” the current account deficit is expected to be 2.5 percentage points higher in 2040 than in the baseline (4.3 percent of GDP instead of 1.8 percent) and even 2.9 percentage points in 2050 (see Figure 4).

aging population

Suggested reading:

The detailed results can be found here: Bertelsmann Stiftung (Editor) (2019). Consequences of Ageing and Directed Technological Change. Gütersloh. The report describes other macroeconomic indicators and their age-related developments for all seven countries: the macroeconomic savings and investment ratios, productivity per hour worked, inflation, real GDP and real GDP per capita. Country sheets, briefly presenting the key-results of the individual countries, can be found here.