Labour shortages are widespread across major economies. Thanks to an ageing population and a shift in attitudes towards immigration, labour shortages are here to stay, with profound implications for the global economy and financial markets.
This trend pre-dates Covid-19 but has undoubtedly been given added momentum by the pandemic.
We expect this trend to continue, dampening prospects for economic growth both in China and, at the margin, the rest of the world (recall that China has accounted for more than a third of global GDP growth over the past 10 years, three times more than the US’s contribution).
Our analysis suggests that the adverse demographic changes will cost China 0.2 percentage points in GDP growth annually. However, its economy will continue to see a boost from ongoing urbanisation and improving education levels.
At the same time, the simple maths of economic catch-up — China’s GDP per capita in PPP is some four times lower than the US.
We forecast China to grow around 5% per year over the next five years –above our trend growth estimate of 4.6% and faster than all other major economies.
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China still has the potential to overtake the US as the biggest economy in the world in the next decade (in current US dollars), well ahead of the IMF’s forecast for that to happen only in 2038.
India’s advantage
India’s trajectory is different if China’s demographics have negatively affected global growth.
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India’s population has overtaken China’s this year — a remarkable outcome given that it was 200 million below just 20 years ago — and, more importantly, its working-age share to the total population will continue to rise till the mid-2030s on United Nations estimates.
Supportive demographics, economic reform agenda and low leverage will make India the fastest-growing big country, with real GDP growth of 6.3% over the next five years and make India’s equity market one of the most attractive, albeit admittedly not cheap.
Below potential
Globally, the key question is whether this labour shortage will affect global economic growth and inflation over the next decade or will result only in a redistribution of wealth from one sector or region to another. We believe both trends will play out.
We expect economic growth to fall short of potential over the next five years (averaging 1.2% versus a potential growth rate of 1.5% in developed economies) while inflation will decline slowly.
Labour shortages mean we also expect wage growth to outstrip overall price inflation over the next five years, resulting in a redistribution of wealth from business to workers as corporate margins fall to accommodate higher wage bills.
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Increased productivity is the ultimate, growth-friendly solution to labour shortages. Automation is often heralded as the route to improved productivity. The good news is that the world is increasingly embracing machines. The supply of industrial robots has almost doubled since 2015, and World Robotics forecast a CAGR of 7.5% over the next five years. Investment in AI is also growing rapidly. Automation is even more attractive for businesses in a world of wage inflation and long-term sickness.
AI remains the world’s best chance to boost productivity over the coming decades, particularly as there are signs that tech innovation, more broadly, is losing momentum.
Asset implications
The investment repercussions of labour shortages could be profound. We believe the demographic backdrop translated into weaker prospects for equities and other risk assets for two main reasons: Slower economic growth and the ageing population that tends to be less risk-averse.
As the proportion of older people grows, we would thus expect to see a drag on price-to-earnings ratios and equity valuations more generally.
The shrinking of the global workforce points to lower returns from mainstream asset classes over the medium term. It is one reason we expect global equities to deliver annualised returns that are just half the long-term average over the next five years, or some 3% to 4% per year in real terms.
Luca Paolini is chief strategist at Pictet Asset Management
