The pandemic baby bust - The Monday Briefing


The COVID-19 pandemic appears to have caused a baby bust. Nine months on from the start of the pandemic there has been a sharp decline in births.

Chinese cities and US states registered double digit declines in births in late 2020. In January 2021 births were down by over 10% on a year earlier in France, Italy and Spain. UK birth data for recent months are not yet available, but the marked reduction in the number of pregnancy scans suggests UK births have fallen here too.

Birth rates typically dip following economic shocks, with financial and job insecurity deterring some would-be parents. In the West, births fell in the years following the early 1980s and early 1990s recessions and the 2008 global financial crisis.

So it is unsurprising that last year’s recession, the worst since the Great Depression of the 1930s, has lowered birth rates. The postponement of weddings and fertility treatments during the pandemic are additional and unique features of last year’s recession. Professor Ann Berrington of the ESRC Centre for Population Change in Southampton is soon to publish research on the “contraceptive effects of additional chores and home schooling” during lockdown.

What can we expect once countries permanently end lockdown restrictions? A mini ‘baby boom’ seems likely as economic and social activity, weddings and fertility treatments resume. Yet in the same way that downturns create economic ‘scarring’, which impedes future growth, the pandemic recession could cause some people to abandon plans to have children. The full extent of such effects will depend on the pace of the economic recovery and the impact on jobs and incomes. Rebooting consumer confidence holds the key to growth and birth rates.

Leaving aside the short-term ups and downs, the secular direction of change in wealthier, more educated countries is towards declining fertility. In Europe and the US, the total fertility rate, the number of births per woman, has been below the replacement rate of 2.1, the level required to maintain a stable population, since the 1970s. Although birth rates have recovered at times – in the US from the 1970s to 2000s, in Germany since the 1990s and in the UK in the 2000s - they have never returned to the replacement rate (except briefly in 2007–08 in the US before falling sharply since). East Asian countries including China, Japan and South Korea also register birth rates well below the replacement rate.

All else equal, below-replacement birth rates would shrink populations, although Western countries have compensated for this shortfall with immigration, allowing their populations to continue growing in recent decades. Countries with little immigration, like Japan and Eastern European countries, have seen their populations decline.

The ageing of the West and East Asia’s populations has significant economic, financial and business implications.

An older population spells lower growth as a shrinking workforce erodes the productive capacity of the economy and a growing cohort of retirees run down savings. A study by the US Federal Reserve found that between the 1960s and 2000s age-related demographic change boosted US GDP growth by just under one percentage point a year; between 2010 and 2015 an ageing population reduced growth by one percentage point. Population changes have huge consequences, something that the French nineteenth century philosopher, Auguste Comte, summed up as “Demography is destiny”.

According to research by the Bank of Japan and the US Federal Reserve, an ageing population helps explain much of the decline in interest rates over recent decades. (High levels of savings by the baby boom generation have exerted downward pressure on interest rates.) A new book, “The Great Demographic Reversal”, by Manoj Pradhan and Charles Goodhart, argues that as the baby boomer generation leaves work and China joins the West in its population ageing and shrinking, this effect will go into reverse, with the newly retired spending their savings and consuming larger shares of income. Reduced savings will, the authors say, put upward pressure on inflation and interest rates.

An ageing population means an increasing ratio of dependents to workers, putting greater pressure on health, social care and public pensions. In the absence of offsetting rises in immigration, which are politically contentious, the labour force will become older and shrink, putting upward pressure on wages. In Japan, which is the vanguard of population change, the number of jobs available to each applicant rose fivefold over 2010–19.

Meeting these challenges will require societal and economic change. The choices lie in six areas: productivity, workforce participation, health, fertility, public spending and immigration.

The happy solution to a shrinking workforce is to raise the output, or productivity, of every remaining worker. Productivity is a function of a multitude of factors, but technology adoption, capital spending, workforce skills and the business environment are widely seen as being crucial. A society that is preparing for demographic change needs to double down in these areas.

Increasing labour force participation among older workers offers an important counter to demographic change. Unlike the manual work of old, today’s cognitive and relationship-based jobs are more suited to an ageing workforce. Newer ways of working, such as part-time and remote working, along with so-called assistive technology for physical work, mean it is becoming easier for older people to carry on working. Pension retirement ages will surely drift higher, extending working lives. Britain’s participation rate for older workers has risen sharply in recent years and, at over 10% for the over-65s, is high by European standards. Yet the Japanese model, where participation rates for over-65s exceed 25%, suggests it could rise further.

Improving health outcomes for older people would enable more people to continue working and would reduce spending on health and social care. Modern medicine has achieved huge successes in countering cancer and heart disease. Long-established treatments such as hip operations and cataract surgery have raised the welfare, health and mobility of many older people. Arguably the great generational challenge today is tackling the growing prevalence of dementia and other chronic conditions of age.

The most obvious counter to an ageing society is to raise birth rates. But human behaviour is heavily conditioned by wider societal and economic conditions and in rich countries seems resistant to state incentives. Even countries like France that provide generous childcare benefits have failed to boost births up to the replacement rate.

It is hard to see a solution to the challenges of an ageing society that does not involve some limits on age-related public spending. The costs, and the effect on public finances, are eye-popping. The UK’s Office for Budget Responsibility estimates that on current policies UK government debt will rise from around 100% of GDP today to 400% within 50 years, driven mainly by age-related expenditure. The growth and maturing of private sector pensions in recent decades have substantially raised pensioner incomes. Greater private provision, essentially through higher lifetime savings, is likely to be necessary to meet future welfare and health costs.

Finally, immigration has already played a major role in cushioning the effects of ageing in the West. Further migration, possibly from Africa with its exceptionally young population, could offer a powerful counter to future demographic change.

Global birth rates are likely to rebound as the pandemic fades. But whatever happens in the near term the West will continue to age. The solutions are obvious, the politics of implementation torturous. Political parties don’t get elected by telling voters they need to save more and work for longer. The greatest ageing challenge is to convince people of the need for change.

PS: We are upgrading our UK GDP growth forecast. The UK economy contracted by 2.9% in January due to the national lockdown, much less than the 4.9% decline expected by economists; the impact of restrictions on output seems to be reducing as businesses adapt. The speedy rollout out of vaccines in the UK, a significant fiscal boost in this month’s budget and the Biden administration’s huge fiscal stimulus package will help the UK recovery. We expect UK growth to bounce back strongly in the second and third quarter of this year and are raising our 2021 GDP forecast from 4.4% to 5.4%.

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