The tangle of ageing populations and productivity growth - Governor Gabriel Makhlouf at Society of Professional Economists

Governor of the Central Bank of Ireland Gabriel Makhlouf today (25 November) addressed the UK Society of Professional Economists annual dinner. 

Speaking this evening, Governor Makhlouf said:

“Europe is at a pivotal moment in its economic development.

The tangle of ageing populations with weak productivity growth raise questions about the long-term growth outlook.

The need to build economic resilience to both short-term shocks and longer-term transitions become self-evident by the day.

Productivity is at the heart of building that resilience.  The Mario Draghi and Enrico Letta reports present a menu of policy options to help boost competitiveness, and the European Commission has taken note”

“On demographics, change is coming, but we should also look beyond current thinking on dependency ratios that generally assume ‘retirement’ at 65. Increased longevity as a result of healthier lifestyles presents opportunities for our citizens to have longer working lives, should they so choose.  Policies to incentivise working longer, alongside promotion of life-long learning, need to be part of our thinking”

Commenting on demographics, Governor Makhlouf said: “Population changes tend to be slow-moving, driven by developments in birth, death and ageing rates.  But, much like climate change where the effects on society and the economy are all too apparent now, we are already into what I call the ‘quick-quick’ phase of demographic change.  Over the coming decades, the population structure in many countries will go through a very rapid transition phase, culminating in a far larger retired and elderly population. 

“A shrinking working age population is a headwind for growth.  To put it in human terms, the social contract that exists between generations – whereby current workers support retired individuals in the expectation of similar support when they themselves retire – will become increasingly strained.  This will put further pressure on the ability of governments to fund spending commitments for older population groups.

“A related question is what greater longevity might mean for economic activity and productivity if that longevity is primarily a result of people leading healthier lives.  If a middle-aged worker now expects to be working into their seventies, this incentivises education and training throughout their working life, rather than the common assumption that formal education and training largely ends in their 20s. 

“So, in my view, addressing the coming demographic challenge is not just about looking for alternative sources of growth, but also re-assessing how we think about ‘retirement’ and human capital accumulation over the life-cycle.

“There is no avoiding the structural adjustment that will be required.  Facing a rapidly changing global economic environment, it is high time to enact reforms that can spark European productivity growth.

“We require substantial coordination of all our policy instruments. Monetary policy cannot be the only show in town.  There remain structural impediments to the smooth intermediation of funds to innovative projects. The long-touted Capital Markets Union – now rebranded as the Savings and Investment Union – is a prime example. Even in the presence of accommodative monetary policy, it is not clear that financing would flow to the most productive projects. Several cross-border barriers remain. 

“Policies that seek to boost productivity and innovation must be complemented by completion of the EU Single Market. We need to remove the barriers that remain for trade in goods and services.

“Beyond monetary policy, central banks can support innovation in other ways.  One example is the digital euro as a key element of a deeper and stronger single market, fostering cross-border relationships that will boost competitiveness.  Allowing private providers and new entrants access the digital euro infrastructure will enable innovation in payments and consumer financial services.

“Finally, on the always topical issue of monetary policy, recent data make me increasingly confident of reaching our 2% inflation target during 2025, but the stickiness of services inflation and elevated wage growth leave some room for caution. 

Services inflation has averaged around 4% this year in the euro area.  With goods inflation around its long-term average of 0.5-1%, I want to see services inflation closer to 3% in order to be more in-line with our target.

In support of this, there are some signs of labour market loosening, which will help to ease upward wage pressures. Forward-looking surveys and wage trackers also point to a slowing of wage growth next year.

Measures of economic activity have been volatile. Third quarter GDP was towards the top-end of the range in our September projections.  Against this, the November PMI was weak, along with data on new orders. Weaker growth is a downside risk to inflation, and we will know more after the updated Eurosystem staff projections in December.  It is clear that policy remains restrictive and, shocks aside, rates are on a downward trajectory.  Given the volatility and the data and the substantial uncertainty regarding economic policy in trade partners, I remain open-minded on slope of this downward trajectory. This is in line with our data-dependent approach to setting policy.”