The role of demography in recent macroeconomic development in Finland. Risto Vaittinen, ETK 17.3 Ruralia Institute

Transcription

1 The role of demography in recent macroeconomic development in Finland Risto Vaittinen, ETK 17.3 Ruralia Institute

2 Demography has been a missing factor in macroeconomic commentary Recent macroeconomic development has by and large perceived as export driven phenomena Bank of Finland (Kajanoja, 2012, 2013) Professor report (Holmström, Korkman and Pohjola, 2014) OECD Country report (2014) Demographic change has almost completely missing been from this narrative OECD: Future challenge Bank of Finland: Has not yet had an impact In this presentation it is demonstrated that ignoring demographic transition - that has already taken place - gives markedly inadequate account of recent macroeconomic developments Eläketurvakeskus 2

3 Macroeconomic performance measured by GDP (2000 =100) Germany Finland Sweden Euro Area Eläketurvakeskus 3

4 Reasons for slow recovery: Rise and fall of ICT Eläketurvakeskus 4

5 % of national icome 2005=100 Is associated with fall in ICT-exports and deteriorating external balance Net foreign lending (left axis) Export of ICTs (right axis) 40 Eläketurvakeskus 5

6 Exports has been falling because of lost cost competitiveness (real unit labour costs in manufacturing 2000=100) Germany Finland Sweden Euro Area Eläketurvakeskus 6

7 Lost competitiveness because of productivity decline and unfavorable terms of trade Labour productivity Terms of Trade Productivity Productivity excl ICT Eläketurvakeskus 7

8 Slow recovery: Demographic Change as a Complementary Explanation Eläketurvakeskus 8

9 Dependency Ratio in Finland and Industrialized Countries on Average Finland: <15/(15-64) Finland > 65/(15-64) Industrialized countries: <15/(15-64) Industrialized countries: > 65/(15-64)

10 National Transfer Accounts Measure economic flows across age groups in a systematic and comprehensive way. Flows are identified by the economic mechanisms and the mediating institutions. Accounts complement the UN System of National Accounts and are constructed in a manner consistent with macroeconomic aggregates. National Transfer Accounts 10

11 The Flow Account Identity Inflows Outflows Labor Income Asset Income Transfer Received Consumption Saving Transfers Paid l a Y ( a) Y ( a) ( a) C( a) S( a) ( a) Inflows Outflows l a C( a) Y ( a) Y ( a) S( a) ( a) ( a) Lifecycle Deficit Asset-based Reallocations Net Transfers Age Reallocations National Transfer Accounts 11

12 Inverse support ratio by age Ct () Wt () a 0 a 0 ( a) P( a, t) ( a) P( a, t) ( a) - productivity by age a profile ( a) - consumption "needs" by age a profile P( a, t) - population Eläketurvakeskus 12

13 External Balance and Economic Support Ratio C + I + X = Y + M C: Consumption (private and public) I: Investments (private and public) X:Exports C Y = W Y X M = Y C I C W Decomposed by age to distinguish behavioral and demographic changes M:Imports Y:Income/Production X M Y = 1 W Y C W I Y

14 000 per capita Consumption and Wages per capita by Age in Total Consumption Private Consumption Wage Earnings Eläketurvakeskus

15 '000 per capita Thousand Demographic Change and Economic Life-cycle Wages per capita Consumption per capita Population 2000 Population 2013 Eläketurvakeskus 15

16 Foreign net lending (% -relative to GNI) External Balance and Inverse Support Ratio ,0 115,0 120,0 125,0 130,0 Inverse of Support Ratio (%) Eläketurvakeskus 16

17 Ageing and economic structures Young and retired have a negative effect on aggregate saving rate. This implies a higher level of demand for all goods at any given national income. Deterioration in external balance It is useful to distinguish tradable and non-tradable sectors when studying the impacts of ageing Compositional effect of ageing Elderly differ from the working age population in the composition of their consumption. Their consumption is directed towards services which are non-tradable Raises relative price of non-tradables and sifts resources to non-tradable activities Wealth effect Beyond any transfer of resources from workers elderly has accumulated wealth as a source of income Growing number of elderly add purchasing power without adding labor supply Raises the demand for labor relative to its supply and raises non-tradable prices 17

18 Real exchange rate (p T /P N ) Output share (v N /v T ) Real Exhange Rate and Relative Production 1,6 2,5 1,4 2 1,2 1, ,8 0,5 0, Price of tradable/price of non-tradable (2010=1, left axis) Value of non-tradables/value of tradables (right axis) Eläketurvakeskus 18

19 Relative price of tradables Non-tradables relative to tradables Structural chnage and demography Relative prices and support ratio 1,6 1,5 1,4 1,3 1,2 1,1 1 0,9 0, Inverse support ratio Relative output and support ratio 2,6 2,4 2,2 2 1,8 1,6 1,4 1,2 1 0, Inverse support ratio Eläketurvakeskus 19

20 Share of output by sector before and after crisis Eläketurvakeskus 20

21 Contribution of institutional sectors to the change in employment Eläketurvakeskus 21

22 Labour productivity 160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0, Tradables Non Tradables Eläketurvakeskus 22

23 Projected life-cycle deficit in 2030 with alternative working career lengths Eläketurvakeskus 23

24 Conclusions The change in population structure has already had a significant impact on macroeconomic development in Finland Deterioration in external balance has been for a significant part been a natural response to ageing Net borrowing is not sustainable forever Increase labor supply = Increased revenue from surplus producing age in life cycle Diminish consumption Do combination of both Acceleration in productivity growth helps to make the transition in income consumption profiles less painful Eläketurvakeskus 24