Finance & economics | European demography

Working-age shift

Growth will suffer as workers dwindle

THE new-year message from investors and policymakers is the same: Europe has turned the corner. Even so, this year’s economic outlook remains dire. A forecast from the IMF on January 23rd envisages GDP falling by 0.2% in the 17-strong euro area and growing by just 0.2% in the wider 27-strong European Union (EU). But even if a sturdier recovery does eventually get under way, Europe’s longer-term growth prospects will be dulled by an unwelcome new demographic trend.

This year the EU as a whole starts on a long journey—one already begun by the euro area in 2012. The EU’s working-age population (aged 20-64, as Europe’s statisticians define it) starts falling in 2013, from last year’s peak of 308.2m, and will drop over the next 50 years to 265m in 2060 (see chart). The working-age population may be shrinking but the number of older people will carry on rising. That will raise the old-age dependency ratio from 28% in 2010 to 58% in 2060. These demographic shifts, which may be tempered by people working longer, reflect an earlier transition from post-war baby boom to baby bust. They would be even bigger but for an assumed net inflow of over 1m (mostly young) migrants a year.

Europe’s ageing population will cast a pall over growth, which is driven by rising employment as well as higher labour productivity. Higher participation rates in the workforce and lower jobless rates may allow employment to grow a bit until the early 2020s; thereafter it is expected to decline. Based on what may well be an optimistic assumption about potential labour-productivity gains, the European Commission last year projected economic growth of just 1.4% a year in the EU over the next half-century.

Adverse demography will hurt European public finances. The commission expects a rise in annual age-related public spending in the EU of four percentage points of GDP over the next 50 years. Austerity already feels interminable, and there is no end in sight.

This article appeared in the Finance & economics section of the print edition under the headline "Working-age shift"

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