Germany's Economy At Risk Due To Aging Population

We often discuss the implications of demographics and how many developed countries are facing a potential economic cliff if they are not careful. In fact, many are aware of what is taking place yet they cannot stop what is coming.

For the European Union, this could get messy.

Their largest economy, and one of the world's largest exporter, is facing a crisis with an again population. Already businesses are finding it difficult to get workers. This is causing massive shortages, a situation that is likely to get worse over the next half decade.

It is something that many of the largest economies are facing. Outside the United States, the rest of the top 5 economies are racing towards a population cliff. This is not going to bode well for the entire global economy if contraction starts in these nations.

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Germany Is The Epitome

The problem with an aging population is the fact that it creates an upside down pyramid. This means there are more people at the top (older) as compared to younger. From an economic perspective this is catastrophic since older people consume less, require more social services, and are not as productive. This creates a host of issues that no country has figured out how to overcome.

To start, with less workers, companies are forced to pay higher wages. While this sounds like a good thing on the surface, it ends up being a major drain. The result is inflation, something that can be offset to those making the wages. However, it is fatal to those on fixed income, which in Germany's case is becoming a larger portion of its population.

Nations can often offset this by attracting immigrants. The challenge here is that it usually takes about 3 decades to get any meaningful impact. Typically, the first wave of immigration is low skilled. They are also not assimilated to the culture. It is usually the second generation that becomes integrated within the country, going to school, making the contracts, speaking the language, and having a higher level of education. Thus, immigration is a solution that takes a long time to pay dividends.

Of course, with many nations starting to face the same problem, areas that were previously targets to lure immigrants might not be so populated in a couple decades.

The other piece of the puzzle is the tax situation. Economies end up contracting because productivity falls. This is logical. There is another layer to this that is not often discussed. Taxes tend to move capital from those who best allocate it to those who have a track record of being miserable at it: governments. This makes the situation very difficult when the taxes of those working have to increase to support the older generations. It also can set off a great deal of animosity, something that is only going to escalate as we move further down the road.

Germany is facing a peak in their working population as early as 2023. Since many have pensions, this is going to put great strain on the financial condition of the country. Unfortunately, pensions have the same problem as Ponzi schemes: to be effective, they require a consistent flow of new money. What happens when the demographics are such that the money coming in is insufficient? This is a problem that is even worse in Spain.

Massive Deflation

Germany is not going to be a global leader for much longer. This is something that is guaranteed. While there could be inflationary pressures within the country due to wage increases, it is likely the net effect is deflation.

Imports into Germany are certainly going to decline as consumption wanes. This is the problem with many of the developed countries, they are going to reduce what they consume. The fallout from this is felt by all the partnering countries around the world. Unfortunately, a few percent here and there adds up to some major money when looking at things on a global scale.

Germany is the 4th largest economy in the world. Couple this with recent conclusions about China's demographic situation and we can see how 2 of the top 4 economies are facing contraction as soon as this decade. Of course, the #3 economy, Japan, spent the last 25 years fighting their poor demographics.

Many are worried about inflation yet globally, deflation is the likely scenario. There is simply no way around these demographics. They cannot be altered in a short period of time and, it appears, once they start, they do not reverse. Thus it is likely we are facing the same problem, only on a larger scale, 20 years from now.

Production can often be offset, at least somewhere, by automation. There is no replacement, however, for the loss of consumption. When a country have fewer people, those individuals are not around to consume. There is little choice but for an economy to contract under those conditions.

This is the situation facing Germany. While many feel inflation is bad, few realize how catastrophic deflation can be. The Japanese went though 3 decades of economic decline, much of it due to the fact they got older before everyone else. An economy that was once predicted to surpass the US (just like many today claim will happen with China) is now mired in a sideways pattern.

Germany's situation can get dire as soon as 2023. This is how quickly some of this stuff is coming upon us. There is going to be some fallout globally as countries like Germany struggle to keep their economies going.

An aging population is never a good sign. For Germany, it is right at their doorstep.

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