The Shrinking Workforce: Demographics and the Return of Low Inflation
The contrast between persistent inflation in the West and deflationary pressures in China presents a compelling economic puzzle, hinting at a broader global shift. While Western economies grapple with stubbornly high inflation, China faces a sustained fall in prices. The GDP deflator, a broad measure of price changes, has been negative for six consecutive quarters, nearing a deflationary record set in during the Asian Financial Crisis in the late 1990’s. Even headline inflation, at just 0.2%, is exceptionally low.
This divergence challenges conventional economic wisdom. While Western orthodoxy often equates modest inflation with economic health, the idea that falling prices are inherently negative deserves scrutiny. Lower prices increase consumers’ purchasing power, and in competitive markets driven by innovation, prices should naturally decline as efficiency improves. Given the stickiness of wages, falling prices can boost real incomes.
China’s deflation stems from several factors. Weak consumer spending, worsened by a struggling property market, has eroded household confidence. Regulatory tightening in technology and finance has led to job losses, further dampening demand. Simultaneously, industrial policies boosting manufacturing output have created oversupply, pushing prices down.
However, a crucial factor is often overlooked: demographics. China, like many Western nations, faces a shrinking working-age population. This global trend has profound economic implications. A shrinking workforce naturally reduces aggregate demand, as fewer people enter the labour market and contribute to consumption. In such a scenario, consistently high demand becomes less likely. While businesses may eventually reduce production, this takes time, and initially, exporting excess supply can put downward pressure on global prices. This suggests that China’s deflation may foreshadow a broader global trend towards disinflation or even deflation.
This demographic context alters the interpretation of China’s deflation. While the conventional narrative focuses on domestic factors, the global demographic backdrop offers a more nuanced perspective. According to the United Nations, by 2030, 64 countries will have smaller populations than they do today. The notion that excess supply is uniquely Chinese is therefore misplaced; declining populations are a global reality, particularly in Europe. Given the West faces similar demographic headwinds, albeit at varying paces, global demand dynamics are destined to be fundamentally altered.
The declining populations of developed nations are likely to exert a powerful and sustained downward pressure on global demand, counteracting recent inflationary forces. This demographic reality suggests a fundamental shift in the global economic paradigm, requiring a reassessment of long-held assumptions about inflation and growth. This leads to a crucial conclusion: while short-term inflationary pressures from the fallout of the Covid-19 pandemic may persist for a while, the longer-term trend points towards a return to ultra-low inflation, and consequently, ultra-low interest rates. The Chinese experience offers a valuable, if unsettling, preview of a potential global future.
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