Europe’s demographic challenges are becoming a ticking time bomb for the region’s economy, with Morgan Stanley delivering a grim prediction for its effects on GDP.Morgan Stanley says Europe’s aging population could shave 4% off the Eurozone’s GDP by 2040 as people live longer and birth rates fall.The bank projects a significant loss of GDP based on predictions that Europe’s working-age population will shrink by 6.5% by 2040, due to a reduction in the number of working-age people producing output and paying taxes.Italy is expected to be the biggest victim of this decline, with an aging population knocking around 6% off the country’s GDP over the next 15 years. France and Germany will also see sharp declines, though less than the EU average.In countries where hospitality is a bigger driver of the economy, the impacts on GDP are expected to be outsized, as fewer people fill those roles while an older population increases the tax burden.The only country set to expand thanks to shifting demographics is the U.K., Morgan Stanley says. The country is expected to add four percentage points of GDP by stabilizing its working-age population. Falling productivity, however, is expected to remain an issue for the U.K.How to fix Europe’s population crisisCountries across the West are grappling with a steady decline in the working-age population, a trend that has already played out in countries like Japan and South Korea. It’s increasingly becoming a hot topic of conversation in Europe’s boardrooms. Morgan Stanley scoured more than 300,000 commentary transcripts to find that mentions of “ageing population” had experienced a sharp increase in recent years, with nearly 5% of C-suites bringing up the topic.The options available to policymakers to address growing anxiety over that demographic time bomb, however, don’t look good.Morgan Stanley says there are two main options to turn around falling populations. The most preferable option, a fresh baby boom, is unlikely to occur.“Even if an effective policy existed to raise birth rates and could be implemented immediately, it would be more than 15 years before this policy impacted the labor force. Hardly a short-term fix,” the authors wrote.The bank hypothesized whether a sudden uptick in birth rates in the 2000s, driven by the advent of IVF treatment, could be replicated now. While fresh growth from IVF was a one-off, other policy implementations may help. “The recent steps to expand childcare could act as a demographic measure, and high levels of net migration in recent years could provide some support to fertility rates. Hence, we think there is some scope for fertility rates to at least stop falling.”Indeed, reforms to increase net migration are the most likely way to address a falling working-age population and, accordingly, economic growth.The topic of immigration has flared up in Europe in recent years, with far-right, anti-immigration parties gaining significant ground this year, like the National Rally in France and Alternative for Deutschland (AfD) in Germany. This has made it harder for governments to tout the benefits of immigration to voters.A much less palatable third option to save GDP, Morgan Stanley says, is for the remaining working age population to increase their working hours. Raising the retirement age is another option likely to be unpopular with voters.The most effective, while still realistic, combination is higher migration combined with increasing the female participation rate in the workforce, the bank says. This could address the current projected economic growth gap by increasing GDP by four percentage points.While fewer working-age people might suggest higher wages for the workers who remain, Morgan Stanley points out that the negative GDP effects of population decline will probably have a negative impact on earnings.The bank’s report lays out a grim set of obstacles for Europe in overcoming one of its most existential challenges in the coming decades. Doing nothing could be disastrous.
