China’s economy is set to experience many challenges if it does not actively combat its demographic issues as the working population ages.
China’s remarkable economic growth over the past few decades has been closely tied to its vast population. However, the country’s demographics are undergoing a significant transformation that is set to have profound implications for its economy.
As China’s population ages, the nation must navigate a complex landscape of challenges and opportunities to sustain its economic momentum and remain the world’s second-largest economy.
One of the most notable demographic shifts in China is its ageing population. It appears the country is now suffering the effects of the one-child policy implemented between 1979-2015 to mitigate rapid population growth. Hence the emergence of a rapidly ageing society.
The proportion of elderly citizens aged 65 and above is rising as the proportion of the working-age population starts to decline. Statista estimates the size of China’s population between 15 to 64 years (working age) is set to decrease by 117 million between now and 2040.
This foreshadows the magnitude of China’s demographic problems starting to surface. In decades to come, as people start to retire from the labour force there seem to be fewer qualified people to replace them. Could we possibly see the downfall of such an economic power?
Implications for the economy
Firstly, the labour force faces potential shortages, which may be incredibly problematic as the workforce will constrain economic growth.
As the labour force shrinks the productive capacity of the economy shrinks as productivity slows down, meaning output is negatively impacted.
It would naturally follow as output falls economic growth also falls. Depending on the severity of China’s demographic issues in the future, this could lead to sustained periods of recession, which is two or more consecutive quarters of negative economic growth.
Secondly, the anticipation of a recession would add to existent deflationary pressure, which simply means the propensity of consumers and investors to spend falls, negatively impacting aggregate demand.
If the Chinese government fails to quickly address such possibilities, China’s economy may be on its way to collapse.
All hope is not lost
There is still hope for China. To counter the effects of an aging workforce China has heavily invested in automation, artificial intelligence and robotics.
If their investments pay off, these technologies may help to bridge the productivity gap caused by a shrinking workforce. However, the transition to a fully technology-driven economy requires a skilled workforce competent in operating these advanced systems.
Flexibility, foresight and effective policy implementation will be essential to ensure a prosperous future for the nation amidst this demographic shift, or they face the steepest economic decline in years.
