Writing in the Ottawa Citizen, MLI senior fellow Linda Nazareth explains the economic challenges Canada will face due to the imminent end of a demographic sweet spot that has led to tremendous growth in the developed world. Nazareth, author of the MLI commentary paper "How to open economic doors as Canada's demographic window closes", says Canadian policy makers need to act soon to head off serious economic consequences. 

Linda Nazareth, February 27, 2014

Do you hear that sound? It is the sound of a series of "demographic windows" slamming shut, and it spells hazards for Canadian economic growth. Canadian politicians should be taking this seriously, but if a plan exists I have not seen it explained in a meaningful way, particularly in the latest federal budget.

The "demographic window" is effectively the years in which the stars are lined up for any country's economic growth. It takes the right mix of population: a balance of children, those working and paying taxes, and the elderly who have completed their work lives. Using the United Nations' precise definition of it, by my calculations, Canada's demographic window has been open since 1975 — and it will close in 2015. In some parts of the world the world, notably Europe, the demographic window has been closed for years. In others, such as China, the window will be open a bit longer.

It will play out in different ways. For one thing, an older population consumes differently than a younger one, and they work differently as well. In Canada, projections by the Bank of Canada show that in the absence of any adjustments, the average incomes of Canadians could be as much as 20 per cent lower by 2032 than they would have been without population aging.

But hey, no problem, if consumers are spending less, government can always offset that right? Well, maybe, but the spending that takes place may not be for the things that beget growth. There are going to be mounting bills for the things that go along with an aging population. Research done by the International Monetary Fund suggests that G-20 countries will have to spend four times the current output to pay for health care, pensions, and long-term residential care associated with aging over the period from 2009 to 2040. That money will have to come from somewhere, whether from taxes or from siphoning it away from potentially productive spending.

There are other issues afoot as well, some relating to the financial markets. Think about interest rates: the closing demographic window could mean that they are headed higher. After all, as the boomers earned money, they saved some of it too. There was lots of liquidity available, and, as a result, interest rates could be relatively low, as indeed they were from the 1990s on. As that trend reverses, Canada may be one of many countries that finds itself with a lot less in terms of available capital, a situation that could force up interest rates or force borrowers to access capital from outside the country.

Sadly, the stock market too could be a victim of an old and older world. A lot of the good years for North American equities have had a lot to do with favourable demographics. Conversely, looking at the way the demographics are going indicates that Canada and the U.S. could be headed into a secular bear market that lasts until the early years of the 2020s. Looking abroad for better returns could give investors a bit of breathing room, but the closing demographic windows elsewhere also suggest that countries such as China cannot count on endless bull markets either.

But then, we always knew there were demographic problems ahead, right? So why then have we done so little to offset them? You can juice growth rates by encouraging innovation through all kinds of policies, but Canada is not succeeding there. You can add to the stock of capital by encouraging savings, which is not being done in a meaningful way either. You can encourage investment by creating a climate of confidence; the jury is out there, too.

This could be a golden age for Canada: we have come through the recession if not unscathed, a least less scorched than many countries in the world and we have resources of all kinds. In spite of the oft-repeated phrase, demographics is actually not destiny and does not have to mean the end of a prosperous society. If the demographic train is going to be stopped, however, it will have to be through well-designed policies and safety nets, not through luck or blind hoping for the best.

Linda Nazareth, a senior fellow at the Macdonald-Laurier Institute, is an economic consultant, broadcaster and speaker. She is author of the MLI commentary paper, "How to open economic doors as Canada's demographic window closes", based on her new book, Economorphics (economorphics.com).