The Labour Government has put all its eggs in one basket: the promise of economic growth. This is proving hard to achieve. As the Chancellor Rachel Reeves prepares to make more policy announcements meant to boost growth, Victor Bulmer-Thomas argues the UK, along with other developed economies, is likely facing a future of zero growth due to one key structural feature: population decline.
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The favourite catchphrase of the previous Labour government was “education, education, education”. In the case of the current Labour government, it looks like being “growth, growth, growth”. However, these words do not constitute a strategy, much less a policy, and amount to little more than a mantra. Indeed, looking forward over the next decade, the reality in the UK may be very different. “Zero” growth, defined here broadly as a change in annual Gross Domestic Product (GDP) of less than 0.5 percent, may turn out to be closer to the truth.
Growth, of both population and economic activity, has not been the norm during most of human history.
This will be considered by all Labour strategists – not to mention much of the public – as heresy verging on treachery. As a society, we have become so hard-wired to expect growth that it is hard to shift to another paradigm. Yet growth, of both population and economic activity, has not been the norm during most of human history. It is only in the last 300 years or so that we have become accustomed to rising populations together with increases in real GDP and even then, there were plenty of exceptions.
Negative net births
Driving it all has been the relentless rise in the world’s population from one billion two hundred years ago to around eight billion today. However, this phase of human evolution is about to come to an end with peak population expected in the mid-2080s and possibly a generation earlier. The “canary in the mine” telling us this will happen is the Total Fertility Rate (TFR), which is the average number of children born to women between 15 and 49. When the TFR in any given country drops below 2.1, it is a sign that annual net births (births less deaths) will soon turn negative (it was 1.44 in England & Wales in 2023). And this, as we shall see, will have major implications for GDP growth in the UK.
Most of the ten largest economies in the world already have negative net births and all are expected to do so by 2030 based on current trends of birth and death rates.
That this moment will soon be upon us becomes clear when we look at the ten largest economies in the world ranked by GDP at Purchasing Power Parity (PPP). Ranked number one is China, while the UK scrapes in at number ten (USA is number two and France number nine; the others are India (3), Russia (4), Japan (5), Germany (6), Brazil (7) and Indonesia (8)). These ten countries account for half of the world’s population and nearly two-thirds of global GDP. It is a mix of developed and developing countries and yet every single one except Indonesia has a TFR below 2.1 – even India where it has now fallen to 2.0. And in Indonesia in 2024 it was measured at 2.2 – only just above the threshold.
While a TFR below 2.1 points to negative net births in the future, it does not tell us precisely when this will occur. Indeed, the timing of the relationship between TFR and net births is very complicated. It took a mere two years in Germany, while in the UK it took 50 years. However, the median looks to be around 30 years with a lag of this magnitude having been experienced by China (31 years), Japan (31 years) and Russia (28 years). As negative net births are still some way in the future in Brazil, India and Indonesia, we can leave them out of the story, but add in Italy (11th in the GDP at PPP ranking) as it shares with the UK many demographic characteristics. These eight countries – China, USA, Russia, Japan, Germany, France, UK and Italy – still account for 50 per cent of global GDP and 35 percent of the world’s population. Most already have negative net births and all are expected to do so by 2030 based on current trends of birth and death rates.
As net births have turned negative, governments came to depend to a greater or lesser extent on net inward migration to sustain their populations and avoid the premature aging of their societies.
Net inward migration
Political leaders in these eight countries have been aware for many years of the demographic trends outlined here. A few have tried offering incentives to women to have larger families, but with no long-term success. However, as net births have turned negative, governments and businesses in this group of countries came to depend to a greater or lesser extent on net inward migration to sustain their populations and avoid the premature aging of their societies. Indeed, in the most recent year for which we have data the rate of net inward migration (as a percentage of population) varied from a low of 0.1 per cent (Japan) to above one percent in the UK (in China there was net outward migration).
Yet inward migration has proved to be so politically toxic that this is bound to have an effect on when the overall population starts to drop.
These rates of migration have not been sufficiently high to prevent population from falling in four countries on our list – China, Italy, Japan and Russia. These countries are experiencing a demographic decline as a result of rates of net inward migration that are not high enough to compensate for negative net births. On the other hand, high rates of net inward migration have so far helped to increase population in the other four countries (USA, France, Germany and the UK). Yet inward migration has proved to be so politically toxic that this is bound to have an effect on when the overall population starts to drop. So, because of this toxicity, we can be fairly sure that the rate of net inward migration will have fallen by the end of this decade – almost regardless of the economic consequences – as the main political parties no longer want to make the case for high levels of inward migration.
We can think of net inward migration as being ‘low’, ‘medium’ or ‘high’ and we can then define the flow as a percentage of population as 0.1 (low), 0.5 (medium) and 1.0 (high). Using 2030 UN projections on net births for our eight countries, we can easily establish that all of them will have falling populations by 2030 if migration is low and half of them (Russia, Japan, Germany and Italy) will also have falling populations even with medium migration. Only in the case of high migration will all populations increase and yet this is the one option probably not available to policy-makers (and certainly not in Europe) as a result of public opposition and political pressure.
Does a declining population mean a declining GDP?
We can conclude from this that within a decade, the population of the UK will either be falling or stationary. What does this mean for growth? The relationship between demographic decline and GDP growth is complicated, but we can make some headway by looking at the rest of the world. There are 78 countries in the World Bank database where population growth is “zero” (i.e. below 0.5 per cent per year). About half of these have net outward migration, so they are not especially relevant to the UK’s situation. All of the rest have net inward migration, but are divided into (a) those where population is still rising and (b) those where population has started to fall.
The UK up to now has been in the former group, but is likely soon to enter the latter. It will join a group of countries where, although population is falling in all cases, GDP growth has been very varied. At one extreme is China, where GDP growth in the last ten years has averaged 5.8 per cent, while at the other end of the spectrum is Japan with annual GDP growth over the same period of 0.6 per cent. The UK cannot emulate China (the Chinese rate of investment as a share of GDP is very high and the British one very low) and is unlikely to replicate the experience of other countries in the group such as Croatia, Latvia, Montenegro, Poland, Romania and Serbia whose positive GDP growth in the last ten years reflects their transition from state planning to market economies as much as anything else.
Demographics will reduce the labour force, while increasing the number of dependents. Taxes may have to rise to accommodate this change. Trade opportunities may shrink as the world retreats from globalisation through the application of protectionist policies such as tariffs.
The UK is therefore likely to find itself in a peer group that includes not just Japan, but also France, Germany and Italy. By 2030, or soon after, this group will all be experiencing negative net births, positive net inward migration and falling populations with very low or zero GDP growth. This has already happened in Italy and Japan, is happening now in Germany and can be expected soon in France and the UK. For some in the UK it is a dismal prospect, but at least GDP per head growth will be higher than GDP growth as the population will be falling.
There are many counter arguments that could be employed to challenge this conclusion – some more realistic than others. The weakest argument concerns net births, where there is very little chance of births exceeding deaths. It could also be argued that the UK could sustain a “medium” level of net inward migration without undue political (or fiscal) cost, although that looks improbable in the present political climate. Some see a way out of this via a big increase in the rate of investment, although – given the post-war history of investment in the UK – this is a big leap of faith. More plausible is the claim that total factor productivity – the amount by which output changes with the same level of labour and capital inputs – will increase as a result of public sector reform, the intensification of Artificial Intelligence solutions, new external trade opportunities and deregulation.
A more realistic outlook for the UK economy is one of “‘zero” growth. Are there any British politicians bold enough to tell the public the truth and adjust their vision for the country accordingly?
All this is theoretically possible, but there are significant headwinds in the face of the UK economy for the next ten years. Demographics will reduce the labour force, while increasing the number of dependents. Taxes may have to rise to accommodate this change. Trade opportunities may shrink as the world retreats from globalisation through the application of protectionist policies such as tariffs. “Net zero” carbon emission solutions, while much needed to mitigate the damaging impact of global warming, will not necessarily promote growth. Thus, a more realistic outlook for the UK economy is one of “‘zero” growth. Are there any British politicians bold enough to tell the public the truth and adjust their vision for the country accordingly?
All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science.
Image credit: JessicaGirvan in Shutterstock
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