The silver lining in the baby bust

Last spring, at the beginning of the pandemic, there was a suggestion that long-term home arrest might lead to something of a baby boom.

I wasn’t convinced: who wants to have sex when they’ve been repeatedly told that being touched or breathed on by the wrong person is an almost certain path to instant death? It’s just not sexy is it?

It turns out I was right on this one. We cleaned out pet shops and animal shelters (we now have a few substandard house rabbits to cope with — there wasn’t much choice). But physically produce our own little things to love? No. Birth rates, which were already falling, have dropped further over the past year. In England and Wales we are down to 1.6 per woman. The rest of the world is headed in the same direction. In the US, the fertility rate fell last year to 1.6. 

That represented the sixth consecutive annual decline. In China it’s 1.69. Japan, Italy, Taiwan, Greece and Portugal are all under 1.5. Only in sub-Saharan Africa are average fertility rates still what we would consider high (over 4). 

You can attribute this to all sorts of things — from the long-term improvement in child mortality figures to the economic dislocation of the global financial crisis and lockdowns to expensive housing and climate crisis freak-outs. But while there are scraps of baby joy about (Princess Beatrice has just announced her first pregnancy) the general trend is pretty clear: in most developed countries populations are only not shrinking because they are ageing.

Does it matter? You’d think given the general hysteria about planetary overpopulation everyone would be pretty pleased. Far from it. Instead we have gone from too-many-people argh to not-enough-people argh. 

The problems, says the pessimists, are threefold. Without more young people to support the old the dependency ratio will rise to unsustainable levels. Without young people we will lose our creative mojo. And finally, without young people, demand will fall and we will end up in a spiral of long-term deflation. Older people are replacers of goods not active buyers — the more of them we have, the more overall demand will fall. Sounds awful doesn’t it?

Luckily, it might be another consensus opinion that isn’t quite right. Start with the spending. Look at the 2018 ONS data, and you will see that the highest-spending homes as ranked by age of the household head are the 30-49 group (£666 a week). Next come the 50-64 cohort (£633), the 65-74 group (£506) and the 75s and over (£336). 

There are a few things to note here. First, the under-74s are pretty big spenders, and second, the fall-off above that in part surely reflects a big increase in one-person households in the older age groups: in 2019 49 per cent of those living alone were 65 or over.

It might be that the idea that oldies are frugal waste-not-want-nots is based, in the UK at least, on the behaviour of those who hit adulthood during the austerity of the war years

Other statistics also suggest that older people aren’t as parsimonious as you might think: across the G20 developed countries, spending by older households (led by someone over 50) made up 22 per cent of gross domestic product — and makes up more than the combined GDP of Japan, Australia, Canada and Brazil. It also grew by 9 per cent from 2010 to 2015, with the highest rises in countries where the employment of older people is rising fastest. 

In 2005 the average over-50s led household in the G20 spent $2,577 less than the average under-50s household. But in 2010 the difference was down to $367.

The UK-based International Longevity Centre, a specialist think-tank, in a report called The Global Longevity Dividend, says that “is consistent with trends . . . identified in the UK over a longer time period”. 

It might be that the idea that oldies are frugal waste-not-want-nots is based, in the UK at least, on the behaviour of those who hit adulthood during the austerity of the war years and then entered retirement on fixed incomes, rather than on those who hit adulthood in the 1960s, achieved their peak earnings in the 1990s, and obtained manna from inheritance heaven in the 2000s (the frugal generation having left them a lot of housing wealth). On top of this, they tend not to retire completely as previous generations did. 

This younger lot seem to have a different attitude (along with more flexible spending power). Anecdotally, I know a couple of examples (enjoying your new car, Mum?) It might also be that if companies really start thinking about creating products these more flexible spenders want, the gap between their spending and younger generations disappears completely. 

One of the great mysteries of marketing has long been the sector’s insistence that the best way to sell stuff is to make young people want it. I would have thought the best way to sell stuff would be to make people with money want it. It might not be quite so much fun to market your product to the over-50s but my guess is it is a lot more lucrative.

Other good news surely comes in the form of wages and productivity. Assuming no rise in productivity, output will obviously fall as the working population falls.

But why would you assume no rise in productivity? Might it be that the easy availability of low-cost labour globally (due in large part to the opening of China and reintegration of eastern Europe to the global economy) has not only created decades of deflation, but also put a lid on productivity growth for decades (who needs to invest in technology when you have cheap people)? 

And now, might a coming lack of cheap labour reverse that trend? Think of robots and artificial intelligence as extra pairs of hands and what’s the problem? Productivity might be about to soar — something that makes miserable mutterings about dependency ratios entirely redundant: if the worker of 2040 can produce three times as much as the one of 2020 what matter if he has two more high-spending oldies to produce goods for?

Wages should soar, partly because of the productivity rises and partly due to the increased bargaining power of the young. So there you have it. You’ve got used to the idea that baby busts and the ageing populations they come with are a bad thing. They might not be.

The obvious costs are high (health and social care) but the benefits are much overlooked. 

If you must worry about something, worry that the dynamic will add to the long-term inflationary impulses already building in the economy as the well-off old spend and splurge and the hard working young demand more cash to produce the goods for them to buy. Keep your portfolio primed for that. 

Otherwise, there are plenty of exchange-traded funds around that let you invest in the nothing-wrong-with-lots-of-old-people theme: iShares has a health company-heavy Ageing Population ETF). There are also some interesting individual stocks that will make good long-term holdings around the theme: for example, Smith & Nephew make the joint replacement systems that I fully anticipate having in my knees within 15 years.

Among actively-managed funds is the Axa WF Framlington Longevity Economy fund. Top holding? Nike. The new old (and their new knees) aren’t the same as the old old.

Merryn Somerset Webb is editor-in-chief of MoneyWeek. Views are personal. merryn@ft.com. Twitter: @MerrynSW