Growth will slow down further as Japan and Europe's working age population shrinks: DBS

The US, Japan and Europe are growing above potential if benchmarked to no. of working age people, DBS says in a report, arguing that the chances are that growth will slow down further.
Population limit on growth Falling population has lowered supply side growth far more than what is assumed. Two, societies are ageing. "Put the two together and working age population growth – i.e. labour force growth – is falling like a rock throughout the US, Europe and most of Asia," says DBS. In Japan, working age population is shrinking 1 per cent every year. In Europe, working age population growth is zero or even negative. In the US, it is down to 0.4 per cent from 1 per cent in 2008
The Math GDP growth is sum of productivity growth and labour force growth, DBS explains. This implies potential growth will decline in line with working age population growth. Of course, the extent will depend on productivity growth numbers.

In the developed world, 1.5 per cent productivity growth is considered very strong. Even if this strong productivity growth is assumed, in Japan, potential growth comes to 0.5 per cent (1.5 per cent productivity growth minus 1 per cent decline in labour force growth). Europe’s potential growth comes to 1.5 per cent and for the US 1.9 per cent. In all the three, actual growth exceeds potential growth.

Growth question If growth in the US, Europe and Japan is above potential, then DBS raises three questions: Why does everyone fret over 'slow' growth when it is running at or above potential? Why are central banks still pursuing QE, NIRP and near-ZIRP? How likely is growth to pick up this year or next?

The answers: People fret over lower growth because they are not aware of how rapidly working age population growth (WAPG) has fallen. For the same reason, central banks are continuing to pump in liquidity. The third question is the worrying one. DBS says: "Finally, if the UN is correct and WAPG continues to fall for the next 10-20 years, GDP growth probably will too. In short, if you’re worried about slow growth today, get used to it. Odds are it’s going down next year (and year after), not up."