A comparative demographic analysis of EU28

Transcription

1 Global Demographics and Pensions Research A comparative demographic analysis of EU28 Global Demographics and Pensions Research Research Analysts Amlan Roy amlan.roy@credit-suisse.com Sonali Punhani sonali.punhani@credit-suisse.com Angela Hsieh angela.hsieh@credit-suisse.com Our comparative demographic analysis of EU28 is detailed for 12 countries (Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden and the UK) with an outline for the remaining 16 countries. EU28 s consumers and workers are very different and this has economic, social and political implications. We present these differences highlighting that sustainability as a political union for the EU28 requires acknowledging, appreciating and responding to these differences. EU28 is very heterogeneous. Germany is 192 times Malta s population size. Within our 12 selected countries (a) for labour force growth: Germany has the lowest (-.3% p.a.) in contrast to Ireland (1.2% p.a.) over (b) for old age dependency ratio (the number of 65+ aged persons per 1 working age persons): Germany has the highest ratio (32) whereas Ireland has the lowest ratio (17) in 21. Demographics leads to high and rising age-related government expenditures on public pensions, health care and long-term care which adds to the existing debt burden of some countries. EU27 s age-related expenditures of 2.5% in 215 are projected to be 22.8% of GDP in 235. We believe EU28 needs to renegotiate the pensions, health and long-term care promises as fiscal sustainability worsens for younger generations. Demographics also affects EU28 GDP growth through working age population growth, labour productivity growth and labour utilization growth. While France and Germany both posted 1.3% GDP growth over the period, the shares of contributing factors are very different; the factor contributions are also very different for the same country over different periods vs (Exhibit 26). The ECB and other central banks need to factor in the fact that conventional monetary policy is much less effective in an aging and demographically changing world. This has implications for the monetary transmission mechanism, objectives as well as communications and guidance. Household structures and median ages have changed in a historically unprecedented manner, affecting consumer expenditure patterns, savings, debt, wealth accumulation and aggregate capital flows. At an aggregate level, they affect asset prices which lead to changed asset allocations and regional as well as sectoral shifts. We highlight urbanization differences suggesting that policy makers pay attention to geography and population densities as they have implications for congestion, pollution, real estate, quality of health and life. City planning and environmental issues come to the fore in expanding metropolises. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 This report updates our previous two reports on the EU s underlying demographics and the demographic underpinnings of European fiscal sustainability 1. We focus on the core demographic indicators as well as analyzing the differences in the areas of health, pensions, education, growth, savings, trade and size of markets. Our detailed analysis is restricted to 12 countries: Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden and the UK. EU28 is very heterogeneous and one of the most glaring difference lies in population size. In this report, Exhibit 1 illustrates at a glance the population sizes across countries as follows: those shaded in orange (>4 mn.), in blue (1 mn.), in purple (5-1 mn.) and in green (< 5 mn.). Germany s population size (82.7 million) is nearly 192 times larger than that of Malta (.4 million). Exhibit 1: EU28 countries by population size, 213 Color shaded: Countries with population greater than 4mn are shaded in orange; population size between 1 mn: blue; population size between 5-1 mn: pink; less than 5mn population size: green Source: UN, Credit Suisse Exhibit 1 also illustrates the geographical differences across these countries, indicating how geography is strategic to some countries in terms of location, trade and migration. Exhibit 36 and Exhibit 37 in the Appendix show how different all the countries are in terms of their population s age distributions. Exhibit 38 displays the timeline of the progression of the European Union from its six-member version to its current 28-member status. The report is arranged as follows. In section 1 we focus on the core demographic and economic cross-country comparisons. Section 2 shows that consumption trends vary across the countries and they in turn affect savings, capital flows and trade. This is discussed in section 2. In Section 3, we present and discuss labour force, productivity and education trends while section 4 focuses on health and pensions. Section 5 describes the urbanization patterns across the countries along with its implications on sustainability and infrastructure. Section 6 concludes. 1 Credit Suisse Demographics Research, "Spotlighting the European Union's Demographics" (Dec 211) and "European Demographics & Fiscal Sustainability" (Jan 213). A comparative demographic analysis of EU28 2

3 1. Core demographic and economic indicators We present (in Exhibit 2) the scale of differences across 12 selected countries in terms of the aggregate value of output GDP (current prices) as well as GDP per capita and also rank them. Across the selected countries, the GDP per capita differences are nearly of order 3:1 (highest:lowest) and nearly 2:1 (highest:lowest) for GDP. Note that the country rankings change when they are ranked in terms of GDP relative to when they are ranked on GDP per capita. Germany with the highest GDP in 213 is ranked 6 th in terms of GDP per capita due to its large population size. Denmark on the other hand is ranked 8 th in terms of GDP but it has the highest GDP per capita owing to its smaller population. We present the comparative economic and demographic characteristics for the remaining 16 of the EU28 countries in Exhibit 39 in the Appendix where Luxembourg stands out as the highest GDP per capita country, with a level roughly twice that of Denmark. Thus population size matters in terms of economic well-being as captured by GDP per capita. Exhibit 2: Economic and demographic characteristics of selected 12 European countries GDP, 213 GDP per capita, 213 Population, 213 Population density, 21 Current prices Current prices Population per (USD billion) Rank (USD) Rank Millions Rank square km Rank Denmark , Finland , France 2, , Germany 3, , Greece , Ireland , Italy 2, , Netherlands , Portugal , Spain 1, , Sweden , UK 2, , Source: IMF, UN, Credit Suisse Exhibit 2 illustrates the stark differences across both population size and population density. The highest to lowest ratio in terms of population (Germany vs. Ireland) is 18:1. This has implications for voting in the union as well as sustainability. In terms of population density, Netherlands population density is 25 times that of Finland. Of the EU28 countries, Malta has the highest population density of 1,344 people per square km. Our demographic perspective focuses mainly on people as consumers and workers. We next present how different the population growth rates (Exhibit 3) and labour force growth rates (Exhibit 4) are across the selected countries. Population growth rates contribute to increasing numbers of consumers and labour force growth rates contribute to increasing numbers of workers. The differences at a broad level influence aggregate consumption expenditures and GDP. Population growth has remained low for most of our sample countries except Ireland, the only country with a population growth rate greater than 1% p.a. Germany s natural population change (births less deaths) has been declining over the last three decades and it is the only country with negative population growth rate in our sample (Exhibit 3) over As Exhibit 39 shows, the full set of EU28 countries have other countries that are projected to have a declining population over : Bulgaria, Croatia, Estonia, Hungary, Latvia, Lithuania and Romania. A comparative demographic analysis of EU28 3

4 Exhibit 3: Population growth rate, & Rate per annum (%) Rate per annum (%) Exhibit 4: Labour force growth rate, & % 1.%.8%.6%.4%.2%.% % 1.5% 1.%.5%.% -.5% % % Source: UN, Credit Suisse Source: ILO, Credit Suisse Slow population growth has typically been followed by slow labour force growth as shown in Exhibit 4. Germany and Finland are projected to have negative labour force growth over in contrast to Ireland which is projected to have the highest population growth and is also projected to have the highest labour force growth. In Exhibit 5, we present the total fertility rate for the selected 12 countries over and Over , Ireland was the only country with its total fertility rate higher than the replacement level of 2.1 children per woman. However, in the current period , the total fertility rate for all 12 countries is below the replacement rate. In terms of fertility rate changes, over the last three decades, Portugal and Ireland have experienced a significant fertility rate decline while countries such as Denmark and Sweden have seen an increase in fertility rates. Exhibit 5: Total fertility & life expectancy at birth Exhibit 6: Old age dependency ratio, 198 & & Ratio of population aged 65 years and over per 1 people aged years Total Fertility Rate (Children per woman) Life Expectancy at Birth (Years) Denmark Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden UK Source: UN, Credit Suisse Source: UN, Credit Suisse A comparative demographic analysis of EU28 4

5 Life expectancy at birth has improved significantly over to as shown in Exhibit 5. Portugal, Italy and Ireland show the largest increases in projected life expectancy (7.5 years) of the 12 sample countries whereas Denmark and Netherlands show moderate increases of 4.8 years. Currently (21-215), life expectancy at birth is the highest for Italy at 82.3 years, followed by Spain and Sweden. Later in the report we present and discuss another life expectancy indicator (life expectancy at age 65) as this affects health and long-term care expenditures in the later stages of life. Exhibit 6 presents the high old-age dependency ratios (defined as the ratio of population aged 65+ per 1 population aged 15-64) which are caused by low fertility rates and increased life expectancies. Germany, again has the highest old age dependency ratio reflecting the heaviest burden of its ageing population. In our previous report 2, we highlight the characteristics and differences across the five oldest countries in the world. Of the five oldest countries, four are from Europe Germany, Italy, Greece and Sweden. Ireland has the lowest old age dependency ratio of the 12 selected countries, while Cyprus has the lowest ratio of the EU28 countries. Exhibit 7 decomposes overall population change into two components: natural population change (births minus deaths) and net migration. The patterns of migration differ across the selected countries. Italy, Sweden, Portugal and Spain have high levels of immigration dominating their overall population growth. In Germany, net immigration was large enough to offset the negative natural population change from 1985 to 25, which led to a positive overall population growth rate during this time period. However, since 25, the negative natural population change has been greater than the positive net immigration change. Therefore, the overall population of Germany has started to decline and with it the number of domestic German consumers has declined too. Exhibit 7: Population change components: natural population change & net migration, Thousands 4, Germany 3, 2, 1, -1, Portugal Source: UN, Credit Suisse 2, Italy 1,5 1, , Spain 3, 2, 1, -1, Natural Population Change Net Migration 6 Greece Sweden Within the EU28, Austria and Czech Republic also have a very high levels of net migration dominating their overall population change. In contrast, the following EU28 countries had negative net levels of migration i.e., outward migration or emigration dominated Bulgaria, Romania, Poland, Lithuania and Croatia. 2 Credit Suisse Demographics Research, "Macro Fiscal Sustainability to Micro Economic Conditions of the Old in the Oldest Five Countries" (211) A comparative demographic analysis of EU28 5

6 2. Consumption, savings and capital flows We stress that population size is very simply the number of domestic consumers within a country. Our selected countries have different economic structures (we consider the share of household consumer expenditures to GDP) as shown in Exhibit 8. The share of household final consumption expenditure in overall GDP ranges from 45% in Netherlands to 74% in Greece. Since 198, the share of household final consumption expenditures in GDP has decreased for Ireland by 17% but has increased significantly for Greece by 9%. Exhibit 8: Household final consumption expenditure, 198 & 212 Exhibit 9: Consumption by type of goods, 212 Share of GDP (%) Share of total consumption (%) Greece 74 1% Portugal UK Italy Spain % 6% France Germany Finland Denmark Ireland Sweden Netherlands % 2% % Source: World Bank, Credit Suisse Durable goods Non-durable goods Services Source: OECD, Credit Suisse (*211 data) Exhibit 9 illustrates the breakdown of total consumption expenditure in terms of durables, non-durables and services in 212. The share of durables in total consumption expenditures was the lowest for Greece and the highest for the UK. Spain spent the highest share of its consumer expenditures on services while France spent the lowest. Detailed analysis of consumption differences across these countries requires an understanding of their household structure. In Exhibit 1, we show the distribution of households by household size and how it has changed over time. The general trend across these countries is an increase in the share of one and two person households and a decline in the share of four and five persons or more households. Household size matters as the expenditure patterns of larger sized households differ from the expenditure patterns of smaller sized households. The share of one person households is the highest in Sweden and Denmark (47% and 4% of total households) and the lowest in Portugal (21% of total households) of the 12 selected countries. Since 198, Sweden and Spain have experienced the highest increase in the share of one person households. Ireland has the highest share of 5 people or more households and it has also experienced a dramatic decline in the share of 5+ households by 21% since 198. A comparative demographic analysis of EU28 6

7 Exhibit 1: Households distribution (by size): 212 & change since 198 Share of total households (%) 1 person 2 people 3 people 4 people 5 people or more Change from 198 to 212 Change from Change from Change from Change from 212 ( ) to to to to 212 Denmark Finland France Germany Netherlands Sweden Greece Ireland Italy Portugal Spain UK Source: Euromonitor, Credit Suisse Changing family structure has implications for household consumption expenditures which then translate to aggregate consumption expenditures too. The consumption basket of a one-person household is very different compared to that of a four-person household. Age structure matters too. As shown in Exhibit 11, middle aged people consume very differently compared to the old, for example in France and Greece the 6+ spend more on health and food/ beverages and less on clothing, housing and recreation compared to the 3-39 year olds. In countries such as Denmark, Italy and Portugal, the 3-39 year olds tend to spend higher on health compared to the 6+. One possible reason could be that the young professional people in advanced countries are recognizing the need for better health and lifestyles as they live and work longer than previous corresponding cohorts did. Exhibit 11: Share of consumption by age of household head and by type of goods, 212 Share of consumption by type of goods (%) Denmark Finland France Germany Greece Ireland Clothing/ Footwear Housing Health/ Medical Recreation/ Education Food/ Beverages/ Tobacco Other Italy Netherlands Portugal Spain Sweden UK Clothing/ Footwear Housing Health/ Medical Recreation/ Education Food/ Beverages/ Tobacco Other Source: Euromonitor, Credit Suisse A comparative demographic analysis of EU28 7

8 The contra of household consumption expenditures is household savings as household savings is the part of disposable income that is not consumed. Household savings rates vary significantly across these countries, ranging from -7.5% of gross disposable income in Greece to 16.1% in Germany (Exhibit 12). These household saving differences (via aggregate savings) have implications for the overall debt and fiscal sustainability across these countries. Varying debt levels and fiscal sustainability make it difficult for a common set of rules to work in an uniform manner across these very diverse economies. Exhibit 12: Gross savings rate of households & NPISH**, 2 & 213 As a percentage of gross disposable income Source: AMECO, Credit Suisse (*Ireland data is for 22) Exhibit 13: Stock, private bond and public bond market capitalization, 199 & 211 Share of GDP Stock market capitalization Private bond market capitalization Public bond market capitalization Denmark Finland France Germany* Greece Ireland Italy Netherlands Portugal Spain Sweden UK Source: World Bank, Credit Suisse (*Germany data is for 1992) **NPISH: Non-profit institutions serving households. The way these savings are channelized depends on the development of financial markets in these economies. One measure of financial market development is the size of the stock and bond markets (public and private) as shown in Exhibit 13. The UK in 211 had the highest stock market capitalization as a share of GDP, while Ireland had the least. Sweden has seen the largest increase in its stock market capitalization since 199. Private bond market capitalization ranged from 12% in the UK to 181% in Denmark in 211 while public bond market capitalization ranged from 12% in Finland to 91% in Italy. Our previous research 3 highlighted strong statistical links between private savings, current account and budget deficits according to the equation below: S p = I + CA + (G T) where S p = Private Saving, G = Government Expenditures, T = Taxes, CA = Current Account Balance, and I = Investments. A country s private saving can thus be absorbed into one of the following: a) Budget deficit; b) Purchase of wealth from foreigners; and c) Investment in domestic capital. Exhibit 14 presents the savings, investments and current account balance in Germany and Greece over Germany has gross national savings higher than investment and a positive current account balance whereas Greece has gross national savings lower than investment and a negative current account balance. Saving-investment patterns along with the budget deficits are related to the current account balance and trade dynamics and it is important to note the differences across the countries. Savings are also affected by the term structure of interest rates (the yield curve) which is influenced at shorter maturities by monetary policy. In a demographically changing world, monetary policy effectiveness is reduced. 4 3 Credit Suisse Demographics Research, "Demographics, Capital Flows and Exchange Rates" (27) 4 See end of report references to J. Bullard et al (212) and P Imam (213). A comparative demographic analysis of EU28 8

9 Exhibit 14: Savings, investments & current account balance, Germany & Greece, Share of GDP (%) Exhibit 15: Share of exports, imports and trade openness, 212 Share of GDP (%); Trade openness- Sum of exports and imports 8 Germany Greece Current account balance (LHS) Total investment (RHS) Gross national savings (RHS) Ireland Netherlands Denmark Germany Sweden Finland Portugal UK Spain Italy Greece France Trade openness: Exports Imports Source: IMF, Credit Suisse Source: World Bank, Credit Suisse Exhibit 16: Exports by destination, 212 The current account balance is related to the trade balance which is affected by the trade openness of a country (defined as the sum of the share of exports and imports in GDP). Exhibit 15 shows Ireland has the highest trade openness (192% of GDP) and France has the lowest (57% of GDP). Exhibit 16 shows the top export destinations of countries in 212. Denmark Finland France Germany Greece Ireland Share of exports (%) EU EU EU27 59 EU EU27 43 EU Norway 6.6 Russia 9.9 USA 6.1 USA 7.9 Turkey 1.8 USA 19.8 USA 5.5 USA 6 China 3.5 China 6.1 USA 3.8 Switzerland 5.5 China 2.5 China 4.5 Switzerland 3.2 Switzerland 4.5 FYR Macedonia 3 Japan 2.3 Hong Kong 1.8 Norway 3.1 Russia 2.1 Russia 3.5 Libya 2.9 China 1.7 Italy Netherlands Portugal Spain Sweden UK Share of exports (%) EU EU EU EU EU EU USA 6.1 USA 4.6 Angola 6.6 USA 4.1 Norway 1.1 USA 13.3 Switzerland 5.5 China 1.8 USA 4.1 Morocco 2.4 USA 6 Switzerland 3.4 China 2.7 Russia 1.6 China 1.7 Turkey 2.1 China 3.2 China 3.3 Turkey 2.5 Switzerland 1.3 Brazil 1.5 Switzerland 2.1 Russia 1.9 Hong Kong 1.9 Source: WTO, Credit Suisse A comparative demographic analysis of EU28 9

10 The highest share of exports of these countries goes to other European countries. US and China also figure in the list of the top five export destinations of most of the countries. As Exhibit 17 shows the largest share of imports of the selected countries also come from within EU27. China, US and Russia also figure in the list of the top five countries from where imports of most of the selected countries originated in 212. Exhibit 17: Imports by origin, 212 Denmark Finland France Germany Greece Ireland Share of imports (%) EU EU EU EU27 56 EU27 45 EU China 7 Russia 17.6 China 8 China 8.6 Russia 12.4 USA 13 Norway 5.3 China 7.7 USA 6.4 USA 5.7 Saudi Arabia 5.5 China 5.6 USA 2.8 Norway 3.6 Switzerland 2.3 Russia 4.7 China 4.7 Switzerland 2 Russia 1.2 USA 3.1 Russia 2.3 Switzerland 4.2 South Korea 3.9 Norway 1.9 Italy Netherlands Portugal Spain Sweden UK Share of imports (%) EU EU EU EU EU EU China 7.4 China 8.2 China 4.7 China 7 Norway 9.1 USA 8.9 Russia 4.2 USA 6.8 Angola 3.2 USA 3.9 Russia 5.3 China 8.2 USA 3.2 Russia 5.2 Algeria 2.6 Russia 3.2 China 4.1 Norway 4.8 Switzerland 2.8 Norway 3.1 Brazil 2.5 Nigeria 2.8 USA 3.2 Switzerland 4 Source: WTO, Credit Suisse 3. Labour force: activity rates, employment, education and productivity In order to better understand the drivers of economic growth, it is important to understand the productivity and the skills base of the country. The contribution to economic growth comes not only by focusing on numbers of workers but also on their relative labour productivity and hours worked. Economic activity rates refer to the percentage of people of the working age group that are actively employed. Exhibit 18 presents the gender activity gap (male less female activity rates) across countries, highlighting that governments and societies need to encourage and embrace higher female labour force participation as women are a highly educated and skilled part of the labour force. Exhibit 18: Gap between male and female economic activity rates, 199 & 213 Male female economic activity rates (%) % Exhibit 19: Economic activity rate by age- Greece, 199 & EAR increase from : yr olds: 1% yr olds : 1% Source: ILO, Credit Suisse Source: ILO, Credit Suisse A comparative demographic analysis of EU28 1

11 % 17 December 213 This requires changes in labour market practices and institutions but mostly in attitudes. Exhibit 19, Exhibit 2 and Exhibit 21 display the change in economic activity rates between 199 and 213, over the work life-cycle for a typical worker in Greece, Italy and Spain. While the economic activity rates have increased, they have not extended in the latter part of the work life cycle at ages beyond 5 and they need to in order to keep pace with increased life expectancies. It is important to stress that females live longer than males and EU28 needs to modernize labour markets to allow women s education and skills to be better utilized than that which is being done currently. Exhibit 2: Economic activity rate by age - Italy, 199 & 213 % % Exhibit 21: Economic activity rate by age - Spain, 199 & EAR increase from : yr olds: 4% yr olds : 13% EAR increase from : yr olds: 16% yr olds : 16% Source: ILO, Credit Suisse Source: ILO, Credit Suisse Rising youth unemployment and income inequality 5 has become a major issue in the advanced world since the onset of the 28 credit crisis. In 212, Greece and Spain had the highest youth unemployment rate (of total labour force aged years) amongst the EU28 countries, more than double their overall unemployment rates (Exhibit 22). Exhibit 22: Total vs. youth unemployment, 212 % Total unemployment (% of total labour force) Youth unemployment (% of labour force aged 15-24) Source: ILO, Credit Suisse 5 Credit Suisse Demographics Research, "Youth unemployment and income inequality", part of Credit Suisse 214 Global Outlook (213) A comparative demographic analysis of EU28 11

12 Exhibit 23: Gross value added per worker, 211 Over 2-212, Italy, Portugal and Spain saw the most significant rise in their youth unemployment rate. Austria, Germany and Netherlands are the only three countries out of the EU28 with youth unemployment rate below 1%. Income inequality, which is measured by the Gini coefficient, also shows a wide disparity across the 28 countries. Latvia has the highest Gini ratio of 35.9 (i.e. lower income inequality) compared to Slovenia s lowest Gini ratio of 23.7 in 212. Exhibit 23 highlights the productivity differences within our sample while looking at value added per worker in agriculture, industry and services. The productivity differences are quite stark even across the larger more advanced European countries. They are very different across the 16 other countries. Part of the productivity differences are attributable to education as well as the employment structures across different countries. Exhibit 24 presents the differences in tertiary education levels across the countries within our sample the share of population aged years with tertiary education in 212 ranged from 13.8% in Italy to 34.7% in the UK. Thousands of current USD % Agriculture Industry Services Denmark Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden UK Source: UN, ILO, Credit Suisse Exhibit 24: Share of population aged years with tertiary education, Source: Eurostat, Credit Suisse In terms of Human Development Index (a quality of life index) for 212, Netherlands is ranked the highest (rank 4), Portugal the lowest within the selected 12 countries (rank 43) and Bulgaria the lowest within EU28 (rank 57) as shown in Exhibit 25. Exhibit 25: Human Development Index, Global Gender Gap Index, and Corruption Perception Index for the 12 selected countries Human Development Index 212 Global Gender Gap Index 213 Corruption Perception Index 212 Rank Country Value Rank Country Score Rank Country Score 4 Netherlands Finland.84 1 Denmark 9 5 Germany.92 4 Sweden.81 1 Finland 9 7 Ireland Ireland.78 4 Sweden 88 7 Sweden Denmark.78 9 Netherlands Denmark Netherlands Germany 79 2 France Germany UK Finland UK France Spain Spain Ireland Italy France.71 3 Spain UK Portugal Portugal Greece Italy Italy Portugal Greece Greece 36 Source: UNDP, World Economic Forum, Transparency International, Credit Suisse A comparative demographic analysis of EU28 12

13 Gender equality is measured by the Global Gender Gap Index created by the World Economic Forum. We note that in 213 Finland outperforms the other EU28 countries whereas Greece and Hungary underperform. In terms of the Corruption Perception Index, Finland again is on top of the list with the highest ranking along with Denmark (rank=1 i.e., the lowest corruption perception) while Greece has the highest corruption perception (rank= 94) in 212. While education and productivity differences are important to note, what really matters in the aggregate is how that translates to GDP and GDP growth. Exhibit 26 depicts a growth accounting decomposition of the demographic drivers 6 : working age population growth, labour productivity growth and labour utilization growth for France, Germany, Italy, Greece, Spain and the UK. Not only are the cross-country growth patterns important to compare over time periods vs , but are also at least as important as the differing contributions of these three drivers to the GDP growth trends across these countries. Understanding the demographic dynamics of these drivers is essential to understanding and appreciating the growth dynamics. Labour productivity growth has been a dominant contributor to GDP growth for France, Germany, Italy and the UK, while working age population growth was important in explaining GDP growth in Greece in the 198s and in Spain over Exhibit 26: GDP growth decomposed: demographic drivers, Rate per annum (%) France Real GDP: Greece Germany Spain Italy UK Source: UN, GGDC, Credit Suisse 6 Credit Suisse Demographics Research, "A demographic perspective of economic growth" (29) A comparative demographic analysis of EU28 13

14 4. Health and pensions Exhibit 27 presents the forecasts for age-related government expenditure, including public pensions, health care and long-term care, as a percentage of GDP across the 12 selected countries. The total age-related expenditure is projected to increase in all the countries, with Netherlands showing the most significant increase from 17.6% in 21 to 26.3% in 26. France, on the other hand, is projected to spend the greatest amount on age-related items throughout the period (21-26). By 26, the French government is projected to spend 28.7% of its GDP on age-related expenditures whereas the UK is projected to spend the least 2.2% of GDP. While most countries are projected to devote a greater share of government spending on pensions, health care and long-term care, Italy and Denmark present a contrast to the dominant trend with a fall in their pensions expenditure over The increasing promises on age-related expenditure and fiscal sustainability concerns have prompted us to study the impact of demographic variables on a country s sovereign rating 7 detailed in a previous research report. Exhibit 27: Forecasted age-related expenditure components, Age-related Expenditure Components (as % of GDP) Pensions Health Care Long-term Care Denmark Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden UK Source: European Commission, Credit Suisse Exhibit 28 presents gross pension replacement rates for the average male earner in 212. The replacement rate is the ratio of gross pension entitlement divided by pre-retirement income. There exist big differences across our selected countries, with gross pension replacement rate ranging from 33% in the UK to 91% in Netherlands. Countries with a higher than 5% replacement rate promise on public pensions will impose a greater fiscal burden on younger generations, making the current sustainability pressures worse due to weaker growth, higher unemployment and rising inequality. 8 Unlike replacement rates that only look at the benefit level at the point of retirement, gross pension wealth which takes into account life expectancy, retirement age and indexation of pensions, provides a more comprehensive measure of the stock of future flows of pension benefits. We present pension wealth statistics for our selected countries in Exhibit 29. Countries with higher pension replacement rates tend to have higher pension wealth such as Netherlands and Denmark. UK, with the lowest pension replacement rate also has the lowest pension wealth amongst the 12 countries. A NETSPAR paper on pension wealth 9 7 Credit Suisse Demographics Research, "Demographics, Debt & Sovereign ratings" (213) 8 See "Rising Youth Unemployment: a Threat to Growth and Stability" and "Youth Unemployment and Income Inequality", previous reports by Credit Suisse's Demographics Research team. 9 R. Alessie, V. Angelini & P. Santen, "Pension wealth and household saving in Europe - Evidence from Sharelife", NETSPAR discussion paper (211) A comparative demographic analysis of EU28 14

15 estimates the displacement effect of pension wealth on household savings. We believe that gross pension wealth multiples of more than 1 impose inequitable and unsustainable burdens on younger generations. In a previous research report titled Why Increasing Longevity Matters to Us All? 1 we highlighted that that these pensions challenges will need to be comprehensively tackled at various levels by: individuals and families, governments, insurance companies, pension funds, asset managers and corporates. Exhibit 28: Gross pension replacement rates for the average male earner, 212 Gross pension entitlement divided by gross pre-retirement incomes Exhibit 29: Gross pension wealth for the average earner, 212 Gross pension wealth is the total value of lifetime flow of pension incomes, measured as a multiple of gross annual individual earnings Netherlands Denmark Spain Italy France EU27 Sweden Finland Portugal OECD34 Greece Germany Ireland UK Men Women Source: OECD, Credit Suisse Source: OECD, Credit Suisse We believe that in addition to studying life expectancy at birth, it is also very important to consider conditional life expectancy i.e. life expectancy remaining at a given age, typically 65 or 8 years, as that matters more for examining the ageing burden and managing longevity risk. In Exhibit 3 we show life expectancy at age 65, which measures the length of remaining life at age 65 across the 12 countries. Exhibit 3: Life expectancy at age 65, 212 Exhibit 31: Healthy life years at age 65, 211 Years Years Males Females Source: Eurostat, Credit Suisse (* Data is for 211) Germany Portugal Italy Finland EU Greece Spain France Netherlands Ireland UK Denmark Sweden Source: Eurostat, Credit Suisse The indicator Healthy Life Years (HLY) at age 65 measures the number of years that a person at age 65 is still expected to live in a healthy condition. 1 Credit Suisse Demographics Research, "How Increasing Longevity Affects Us All?: Market, Economic & Social Implications (March 212) A comparative demographic analysis of EU28 15

16 France, Italy and Spain have the highest life expectancy at age 65 whereas Denmark has the lowest. In Exhibit 31 we present healthy life expectancy at age 65, i.e., how many years a person aged 65 is still expected to live in a healthy condition. Interestingly, longer life expectancy at 65 does not necessarily translate into longer healthy life at 65 in the case of France and Italy. Denmark, on the other hand, with relatively short life expectancy at 65, has a longer healthy life at 65 for both males and females than that of France and Italy. Of the 12 selected countries, Netherlands had the highest health expenditure per capita in 211 (5,123 international dollar) while Portugal had the lowest (2,624 international dollar) as shown in Exhibit 32. Netherlands health expenditure per capita, despite being the highest amongst the 12 countries, is still 6% lower than that of the USA. In Exhibit 33, we decompose the health expenditure into private spending and public spending. Netherlands total health expenditure accounted for 12% of its GDP, and a significant share of the spending came from public funding in 211 (1.2% of GDP). This contrasts with Greece where public and private funded health spending account for 6.6% and 4.2% of GDP (more equal share) respectively in 211. Exhibit 32: Health expenditure per capita, 211 Exhibit 33: Health expenditure, 211 PPP, Constant 25 international $ 5,5 5, 4,5 4, 3,5 3, 2,5 2, Source: WHO, Credit Suisse Share of GDP Finland UK Sweden Ireland Spain Italy Portugal Greece Germany Denmark France Netherlands Source: WHO, Credit Suisse Total: Health expenditure as % of GDP Private Public The Survey of Health, Aging and Retirement in Europe (SHARE) is a cross- national panel database of micro data on the health, socio-economic status and social networks of people from 19 European countries aged 5 or over. A paper comparing the health among 16 SHARE countries 11 found that Germany shows almost the same high levels of adverse health outcomes as East European countries. Differences in institutional factors have a major impact on health disparities and must be addressed to increase healthy and active ageing in Europe. 11 M. Eriksen, S. Vestergaard & K. Andersen-Ranberg "Health among Europeans- a cross sectional comparisons of 16 SHARE countries" (213) A comparative demographic analysis of EU28 16

17 5. Urbanization In Exhibit 34, we compare the urbanization rates across the selected countries in 198 and 215. Of the 12 countries, the projected urbanization rate for 215 ranges from 62% in Greece to 88% in France. Over , Portugal and Netherlands have seen a significant increase in their urbanization rates. Exhibit 34: Urban population, 198 & 215 Exhibit 35: Distribution of urban population, 215 Share of total population (%) Share of urban population (%) % 9% 8% 7% 6% 5% 4% 3% 2% % % France Germany Greece Italy Spain Sweden UK <.5 mn.5-1mn 1-5 mn 5-1 mn > 1mn Source: UN, Credit Suisse Source: UN, Credit Suisse In Exhibit 35, we emphasize that it is not enough to only focus on the sheer size of the urban population but that it is equally important to consider the distribution of urban population. Germany and Sweden have a more sustainable urbanization model, with about 75% of its urban population residing in smaller city sizes which have less than.5 million population. France, on the other hand, has nearly 2% of its urban population clustering in mega cities with more than 1 million residents. This speaks to the SRI concerns of investors as well as policy makers. While population densities of countries vary between 16 people per square km in Finland to 47 in Netherlands, the densities in major cities are often in the multiples of thousands. While these create economies of scale, there are congestion and pollution costs associated with larger metropolises. Many older European cities are having to deal with expansion due to population increases while being unable to change large parts of the old traditional infrastructure. 6. Conclusions In this report, we highlight EU28 s varying and changing demographics, many of which have been overlooked by countries. The underlying demographics affects the EU28 at multiple levels political, economic and social. Our demographic focus is not only on the number of people but on the changing nature of people as consumers and workers. The changing behavior of consumers and workers affect balance sheets of households, corporates as well as countries. How demographically heterogeneous is EU28? We outline some differences by highlighting the extremes across the countries: population ranges from.43 million in Malta to 82.7 million in Germany in 213, total fertility rate ranges from 1.3 in Portugal to 2 in Ireland and France over and old age dependency ratio ranges from 16 in Cyprus to 32 in Germany in 21. We present scores and rankings that capture quality of life, gender equality and corruption index, which are also related to demographics. A comparative demographic analysis of EU28 17

18 Apart from looking at the standard demographic variables to make our point, we believe our main contribution is to link demographics (consumer and worker characteristics) to macroeconomic aggregates like GDP growth, unemployment, government budgets, trade deficits and capital flows. Consumer demand for goods and services and worker supply of goods and services are both vital to understand GDP. People are not only living longer but much more importantly they are living differently in a global economy which is technologically changing and evolving in terms of its inter-connectedness. Rising youth unemployment and income inequality have been gaining attention as important economic and social issues in Europe. Income inequality also shows wide disparity across the 28 countries with Gini ratios ranging from 23.7 in Slovenia to 35.9 in Latvia (i.e., lowest income inequality) in 212. Education, health, urbanization and employment (or unemployment) as well as distribution of income and wealth (inequality) underlie both the social and economic dynamics of households, societies and countries. Any framework for a reconstituted EU needs to better understand and incorporate the underlying demographic heterogeneity to avoid the mistakes of the past where political agreements ignored the economic and demographic differences across member states. A comparative demographic analysis of EU28 18

19 References Credit Suisse Demographics Research, "Youth unemployment and income inequality", part of Credit Suisse 214 Global Outlook (213) Credit Suisse Demographics Research, Demographics, Debt & Sovereign ratings (213) Credit Suisse Demographics Research, "Rising youth unemployment: A threat to growth and stability" (213) Credit Suisse Demographics Research, "European Demographics & Fiscal Sustainability" (213) Credit Suisse Demographics Research, "How Increasing Longevity Affects Us All?: Market, Economic & Social Implications (212) Credit Suisse Demographics Research, "Spotlighting the European Union's Demographics" (211) Credit Suisse Demographics Research, "Macro Fiscal Sustainability to Micro Economic Conditions of the Old in the Oldest Five Countries" (211) Credit Suisse Demographics Research, "A demographic perspective of economic growth" (29) Credit Suisse Demographics Research, "Demographics, Capital Flows and Exchange Rates" (27) J. Bullard et. al., Demographics, Redistribution & Optimal Inflation, Federal Reserve Bank of St. Louis Review (212) M. Eriksen, S. Vestergaard & K. Andersen-Ranberg "Health among Europeans - a cross sectional comparisons of 16 SHARE countries" (213) P. Imam, Shock from Graying: Is the Demographics Shift Weakening Monetary Policy Effectiveness, IMF Working Paper (213) R. Alessie, V. Angelini & P. Santen, "Pension wealth and household saving in Europe- Evidence from Sharelife", NETSPAR discussion paper (211) A comparative demographic analysis of EU28 19

20 Appendix: Exhibit 36: Age and gender distribution of population of selected 12 countries, 215 In thousands Denmark Finland France , 2, 1, 1, 2, 3, Share of age : 4.3% of total population Share of age : 5.1% Share of age : 5.9% Germany Netherlands Sweden 4, 2, 2, 4, 1, 5 5 1, Share of age : 5.8% Share of age : 4.4% Male Female Share of age : 5.2% Greece Ireland Italy , 2, 1, 1, 2, 3, Share of age : 6% Share of age : 2.9% Share of age : 6.6% Portugal Spain UK , 2, 1, 1, 2, 3, 3, 2, 1, 1, 2, 3, Share of age : 5.4% Share of age : 5.8% Male Female Share of age : 4.9% Source: UN, Credit Suisse A comparative demographic analysis of EU28 2

21 Exhibit 37: Age and gender distribution of population of the remaining 16 of EU28 countries, 215 In thousands Austria Belgium Bulgaria Croatia Cyprus Czech Republic Estonia Hungary Latvia Lithuania Luxembourg Malta Poland Romania 2, 1, 1, 2, 1, 5 5 1, Slovakia Slovenia Source: UN, Credit Suisse Exhibit 38: Timeline of the European Union Original Members New Members Added Year Member States Belgium, France, West Germany, Italy, Luxembourg, Netherlands Cyprus, Czech + Republic, Estonia, Austria, Denmark, Portugal, Hungary, Latvia, Finland, + + Romania, Ireland, UK Greece Spain Lithuania, Sweden Bulgaria Malta, Poland, + Slovakia, Slovenia Croatia Source: European Commission, Credit Suisse A comparative demographic analysis of EU28 21

22 Exhibit 39: Key demographic and economic highlights of the remaining 16 of EU 28 countries, current year GDP GDP per capita Population Population density Current prices (USD billion) Current prices (USD) Millions Population per square km Population growth rate Rate per annum (%) Total fertility rate Children per woman Life expectancy at birth Years Old-age dependency ratio Population aged 65+ per 1 population Austria , % Belgium 57 45, % Bulgaria 54 7, % Croatia 59 13, % Cyprus 22 24, % Czech Republic , % Estonia 24 18, % Hungary , % Latvia 3 14, % Lithuania 47 15, % Luxembourg 61 11, % Malta 9 22, , % Poland , % Romania 184 8, % Slovakia 97 17, % Slovenia 47 22, % Source: UN, IMF, Credit Suisse A comparative demographic analysis of EU28 22