equities

Demographic deficit and rising cost of capital: the next decade

17 June 2022

Henk Grootveld

Head of Trends Investing

Pascal Menges

CLIC Equities, CIO Office

Florian Ielpo

Head of Macro, Multi Asset

Didier Rabattu

CIO, Sustainability Equities

For most of our lifetimes, the global economy was underpinned by an ever-expanding pool of workers. Propelled initially by the postwar baby boom, this demographic dividend helped foster an ideal environment for corporate profitability and share prices. It is one of the four main excesses of the past 40 years that kept the cost of capital abnormally low − but which are now, we believe, poised to reverse.

Need to know

The large generation born after the second world war kickstarted a steady tailwind for GDP growth: an expanding working population that kept labour inflation in check for decades. That era is coming to an end.
The move to a shrinking, ageing society from a growing, youthful one will create a new demographic deficit that will lead to higher inflation and a higher cost of capital.
In part three of our series, “The Next Decade”, we explain in more detail why the workforce tailwind is morphing into a headwind. We also look at the example of Japan – which has already been living with a demographic deficit for some time − and explore whether the effects of a shrinking labour pool can be mitigated.

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