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How population ageing affects financial markets Germany, Japan and USA on focus Rüdiger Daberkow DekaBank Mai 2006 Demographic Development Downward trend in population growth Germany and Japan soon with shrinking populations Population growth* 1.2 0.8 0.4 0.0 -0.4 -0.8 1995 2005 2015 2025 2035 2045 Germany Japan USA *year-on-year, % Sources: United Nations, DekaBank 2 Germany and Japan as examples for the demographic development in industrialized societies Declining population growth rate also in the US, but thanks to strong immigration and higher birth rates still better development Consequence 1: Lower potential growth rate Consequence 2: Pension systems with pay-as-you-go financing in financial distress Consequence 3: Increasing financial burden of the public budget Demographic Development Pension insurance in trouble Dwindling number of employees to carry more and more pensioners Persons in working age per pensioner* 6 4 2 0 1990 2000 2010 2020 2030 2040 2050 Germany 3 Japan USA Number of persons in working age per pensioner halved within the next 30 years Even heavier financial burden for the already troubled pension insurance scheme More individual retirement provisions as sustainable solution Pension systems with pay-as-you-go financing can only guarantee a subsistence-level income Retirement age to rise in order to soften the effects Number of Persons aged 15 up to 64 years divided by number of persons over 64 years Sources: United Nations, DekaBank Demographic Development Ageing as a burden for public finance Continuously soaring expenses for elderly persons Public expenses for persons over 60* 30% 25% 20% 15% 10% 5% 0% 2000 2010 Germany 2020 Japan 2030 Increasing payments for pensions as well as soaring care & health expenses in older age Urgently needed investments in education and infrastructure are inhibited by higher budget burden provoked by elderly persons To moderate the financial burden due to demography, savings should be made However, public debt now is soaring – in Japan, Germany and the US 2040 USA * in % of GDP Sources: Center for Strategic and International Studies, DekaBank 4 Demographic Development Economic growth tends to weaken Population development no longer a growth driver Potential growth* Lower potential growth due to lower population growth rate and shrinking of the population, respectively Consequence 1: Potentially weaker development of financial markets Consequence 2: Increase of public revenues lowered, at the same time soaring public expenditure Consequence 3: Corporations need to find new markets in order not to shrink with the population 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2000 2010 EU 2020 USA 2030 2040 2050 Japan „Average“ year-on-year growth of GDP, % Sources: EU-Commission, DekaBank 5 Demographic Development Effects on financial markets Plunging market prices? Ageing will lead to increasing supply of stocks and bonds, because of dissaving in retirement age Higher public deficit due to increasing expenditure for elderly persons will lead to growth in the supply of bonds Lower potential growth will lead to slowdown of the development of stock markets Result 1: Increasing supply tends to result in plunging prices of stocks and bonds … however: 6 Demographic Development Effects on the financial markets Soaring market prices? More individual retirement provisions will cause higher demand of stocks and bonds Pension funds will invest more in bonds to keep up with promised returns with less risk Global economic growth is expected to remain high with corporations profiting from it Result 2: Increasing demand of bonds and stocks as well as dynamics of the world economy tend to result in soaring prices of stocks and bonds 7 Demographic Development Effects on the financial markets „Soft landing“ of the markets There are good reasons for higher as well as for lower prices in stock and bond markets Regarding the demographic development, a „soft landing“ of the markets can be expected at last, i.e. tendency to slightly falling prices, but with temporarily higher prices in some periods Diversification of investments in products and regions as strategy to manage risk 8 Thank you for your attention!