As the demographic make-up of the UK population changes, economic advisor ;Roger Bootle, asks how this is likely to affect the UK’s future economic performance?
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Over the next five or six decades the UK’s population is set to become older as the post-war baby boomer generation reaches retirement age and life expectancy continues to rise. By 2031 the average age of the population will climb from 39 to 44, while the number of over 40s will over-take the under 40s by 2021.
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This ageing of the working population could have profound effects on the economy. For a start, it is likely to have adverse effects on both employment growth and GDP growth, reducing the economy’s trend rate of expansion by some 0.6% compared to recent years.
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On top of this, productivity growth, and hence GDP per head and living standards, could also be adversely affected if an older workforce is less adept at utilising new technology.
But not only is the UK’s working age population set to get older, but the proportion of the population who are retired is set to rise. The Government projects that by 2050 the share of the population accounted for by the over-65s will rise from its current level of 18% to 26% by around 2050.
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This means that the working population will have to shoulder an increasingly heavy burden in the form of higher taxes to pay for other peoples’ pensions, as well as higher savings to pay for their own. This will leave them with less money to spend on consumption.
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It is possible that the Government’s population projections overstate these threats by failing to take account of the various natural stabilising mechanisms which could offset demographic changes. Indeed, people may simply work for longer, the participation in the workforce may rise or migration could increase to relieve some of the strain.
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Even if these developments end up having little offsetting effect, one source of consolation is that demographic trends are likely to prove even less favourable to a number of the UK’s major competitors. These trends could help the UK economy to over-take that of Germany in the 20 years or so.
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If nothing else, however, the ageing of the population looks set to have a major influence on the pattern of spending activity in the UK economy as the grey pound becomes increasingly important.
On a more current theme, the synchronised global economic slowdown appears to have consolidated in recent months, with evidence that the US economy is coming off the boil and that activity in the euro-zone may be about to weaken further.
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The UK economy has not escaped either, with the slowdown which began towards the end of last year becoming firmly entrenched. Not only has the growth of household spending continued to slow under a combination of a weakening housing market, higher interest rates and a squeeze on after tax incomes, but other sectors have been unable to compensate.
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We continue to expect GDP growth to slow to around 1.7% this year, from 3.2% in 2004, before accelerating only modestly in 2006. With inflation pressures set to ease later this year as the upward impact from higher energy prices fades, the Monetary Policy Committee will be free to respond to the weaker outlook by reducing interest rates.
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We think that interest rates will be back down to their 2003 low of 3.5% by the middle of next year. And given that rates previously reached this low when the housing market and consumer spending were strong, it is reasonable to suppose that in a weaker economic environment they could eventually fall even further.
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