He may no longer be the economics editor at Sky News after making such wonderful comments, quite frankly, it’s a breath of fresh air – someone who finally gets it.
Article below in The Times newspaper…
Welfare payments, inflation and interest rates could be affected by a decline in our population.
We’ve spent so much time talking about deaths recently that we’ve forgotten to talk about births. But something striking has been happening to fertility in this country: it is falling faster than anyone had expected. In 2012, the fertility rate in England and Wales — the number of children being born, on average, per woman — was 1.9. This was already below the replacement level, the number of children that would need to be born to keep the population stable, which is 2.1 children per woman. However, Britain’s rate had always tended towards the upper end of the European spectrum: a little below France (around 2 in 2012) but comfortably higher than countries such as Germany or Italy (both 1.4 in 2012). Add on a liberal immigration policy and, until recently, no one had too many concerns about us facing the kind of demographic pattern seen in countries such as Italy, Japan and Russia, where the population has been falling.
But in the intervening years, something has changed. The fertility rate in England and Wales has fallen rapidly from just below 2 to 1.65 in 2019. By the third quarter of 2020, according to provisional figures published by the Office for National Statistics a few weeks ago, it had dropped again to 1.6. This would be the lowest figure since comparable records began in 1938.
While that rate is derived from births last year, there is no reason to suspect that Covid is the explanation, though the pandemic may bear down on births in future months, as often happens in periods of economic turmoil. With deaths so high and births so low it is plausible 2020 will be the first year since the 1970s to see the former outnumber the latter.
This is before one considers net migration and, according to research published yesterday by Michael O’Connor and Jonathan Portes, the fact that more than a million overseas workers might have left Britain last year. Add it all up and our population could have fallen by the biggest amount since the Second World War.
Still, it’s important to distinguish between short and long-term trends. Immigration could well pick up in the coming years, though much depends on how Brexit goes. The fertility trends, on the other hand, are deeper seated, and it’s not yet clear we have absorbed what is happening here. A decade or so ago Britain had one of the most favourable demographic fundamentals in Europe; today its fertility rate is somewhere in the middle of the pack. Indeed, fertility rates in Germany are rising and might soon overtake Britain’s for the first time in the postwar era.
Why? Perhaps it’s down to cutbacks in benefits, which now only cover two children: Britain’s “two-child policy”. Perhaps it’s because young adults are more financially stretched and less able to get on to the housing ladder these days, which is hardly conducive to having children. Then again, so little research has been done into the collapse in fertility rates that I am left wondering whether enough people have noticed it or taken it seriously enough.
But it matters enormously. It may be a cliché but demography is destiny. There is nothing inherently wrong with having a smaller country but in the era of the welfare state a sudden shift in demography can have enormous consequences. For the time being there are still around seven working-age people for everyone over the state pension age but that ratio is falling, and a shrinking working-age population means more pressure on the working — and more risk that the elderly will not get the support they need.
To give you a broader sense of why these trends matter, consider the argument in The Great Demographic Reversal, a recent book by Charles Goodhart and Manoj Pradhan. For the past couple of decades inflation has been low and interest rates even lower, while growth remained robust. Central bankers assumed it was all down to their hard work. Yet Goodhart and Pradhan suggest it mainly came down to demographics, specifically the arrival in the global economy of China and eastern Europe following the fall of the Berlin Wall. In one fell swoop, western economies had access to a labour market equivalent to a quarter of the world’s population.
This was, in economic terminology, a huge positive labour supply shock. As work could be outsourced cheaply to China or to eastern European immigrants, wage inflation dropped. Central bankers took the credit for slaying inflation but in fact they were simply benefiting from demographic trends that passed over their heads.
Roll on to today and while China remains the world’s most populous country its fertility rate is 1.6, meaning it too is heading for a demographic wall. As its population shrinks and ages, that positive labour shock, say Goodhart and Pradhan, will turn negative. In just the same way as they bore down on prices and wages in the past two or three decades, these demographic forces, both homegrown and imported from China, could push up inflation and interest rates for many years to come.
This isn’t all bad news. Goodhart and Pradhan say the labour shortage should also lift wages, reduce inequality and encourage more investment, addressing three big problems of the past few decades. Even so, this will come as a monumental shock for most central bankers and investors, who are still blithely assuming interest rates and inflation will stay low for the foreseeable future. A lesson, perhaps, that every so often it pays to spend less time thinking about the economic fundamentals and a bit more time contemplating procreation.
Ed Conway is economics editor of Sky News