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Business Commentary It is time for creative economic solutions to deal with aging demographics

Linda Nazareth is a senior fellow at the Macdonald-Laurier Institute. Her book Work Is Not a Place: Our Lives and Our Organizations in the Post-Jobs Economy is now available.

Who needs a recession when you’ve got demographics? Every day investors and analysts mull the economic numbers wondering whether higher rates and a slowing China are going to take North America’s economy into a downturn. Slow activity, slow sales, slow profits, slow markets, slow employment growth – we know the drill. Thing is, our aging population may well give us exactly the same scenarios, no recession required and with fewer easy fixes to turn things around.

All things being equal, people’s consumption patterns change over their lifetimes. Younger households buy homes, cars, furniture and other assorted junk to fill all their rooms. Older households spend too, but their choices are different. For example, Statistics Canada data for 2017 show that households headed by someone aged between 30 and 39 spent a mean of $94,646 in that year, while those aged over 65 spent $60,359, a difference of almost 57 per cent. The gap is even wider for a range of products, from clothes to computers. While it is certainly true that older households spend more than younger ones on some things (such as medical care and charitable donations), those things tend not to be in the area of familiar consumer products.

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And yes, the population in North America is aging and aging fast. Between 1995 and 2005, the working-age population, those between 15 and 64, rose by 6.1 per cent in the United States and 7.3 per cent in Canada. With the boomers hitting their senior years, that growth rate slowed to 2.8 per cent and 3.1 per cent respectively, between 2005 and 2015. Those sound like blockbuster figures compared with the projection for the period between 2015 and 2025, when the U.S. working-age population is expected to grow by 2.3 per cent while the Canadian equivalent expands by 1.6 per cent. In contrast, the growth projections for the population aged over 65 are 37 per cent in the United States and 40.9 in Canada. Accordingly, any company that was counting on a growing working-age population to power demand clearly has some challenges ahead. (All figures are projections from the United Nations World Population Prospects 2017 database.)

If you want to get an idea of how this might all play out, you can get a frightening look from a recent analysis by consulting giant Bain & Co. According to a note for its automotive practice, by 2025, demographic trends alone will reduce U.S. vehicle demand by more than 20 per cent to 11.5 million, which is the level the United States saw during the 2008-09 recession. Throwing a recession on top of that does not really bear thinking about, but suffice to say that it could result in a quick industry transformation much more dramatic than General Motors Co. shutting down a few plants. As the growth rate in the working-age population declines to close to zero in the 2020s, the demand prospects get even grimmer. Keep in mind, too, that all of this is predicated on millennials and Gen Zs being willing to buy cars in more or less the same quantities as their parents, which is perhaps a big assumption in these days of car shares and the like.

Cars, of course, are only one of many product groups where a dearth of demand may squeeze or destroy company profits. To an extent, corporations are preparing for this by trying to tap into global markets where select countries are both growing their middle classes and significantly younger to boot. India, for example, has a median age of about 28, while Indonesia’s is 30 and China’s is 37. The United States at over 38 and Canada at 42 are fairly geriatric in comparison. Still, switching their main markets and taking on local competition is likely easier said than done, whether for auto makers or anyone else.

Dealing with demographic change is arguably more difficult than dealing with business cycle fluctuations. After all, when you see a recession bearing down on you, there are strategies that you can employ. At the highest levels, central banks can cut interest rates and governments cut taxes in a bid to boost activity. At the company level, you tend to get cost-cutting and rationalization measures and they can be effective as well. The strategy is to do what you can and wait out the worst of the business cycle and be ready for the upturn, which does eventually come.

Seeing a demographic tsunami bearing down is something different altogether. For one thing, it can be harder to see given that the transformation happens slowly and evenly and does not just show up in the quarterly figures. For another, the solutions are not simple or short term. Neither governments nor companies can, after all, just come up with a way to instantaneously produce an age-appropriate market desperate to consume whatever is produced.

And so, it is time for careful and deliberate strategies. Those may mean hammering down on costs now in anticipation of slower demand growth ahead, or they may mean adopting efficiency-boosting technologies just as soon as is possible, or they may mean radically changing the product mix offered. In Japan (median age over 47) it has meant a wave of mergers between Japanese and overseas companies, a trend that will perhaps be mirrored in North America.

Or maybe other, creative solutions will be found to deal with what is indeed going to be a game-changer for companies. Unlike recessions, demographic change cannot be avoided and its impacts can be far deeper than a quarter or two of substandard growth.

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