Virginie Maisonneuve & Katherine Davidson, Schroders
“Maternity wards and primary schools in London are experiencing a spike in births, and retailers should benefit”
Over the past decade, some European countries have experienced a significant and persistent increase in fertility rates while others have not. Demographers have identified the ‘original’ demographic transition, whereby mortality and fertility rates fall dramatically as a country develops, as well as the ‘second’ demographic transition, where fertility rates plateau at sub-replacement level and the population ages.
But are we now witnessing a ‘third’ demographic transition? If so, what is causing it, why only in some countries, and what are the implications?
In some countries, the total fertility rate (TFR) has risen by more than 20% since the 1990s. One of the most important explanations for this is that the increase is partly illusory. In the western world, women are postponing having children due to later marriage, education, and career development.
As a result, while fertility for younger women has fallen sharply, fertility for the over-30s has risen. The decline in young fertility outweighed the rise in older fertility until the former stabilised in the 1990s. So the increase in fertility over the past decade might actually be a ‘correction’ of a statistical error in prior decades - completed (lifetime) fertility is not actually rising, it just never fell as much as we thought.
It is too early to assess the magnitude of this ‘tempo effect’, because only the very first ‘postponers’ have reached the end of their fertile lives. Also, while the tempo effect is significant, birth postponement has also occurred in countries such as Germany and Austria, where the TFR has not risen, so there must be other factors at play.
In the UK, more than 20% of births are now to foreign-born women, and ethnic minorities are expected to account for three-quarters of the capital’s population growth over the next 20 years.
However, the major impact of immigration is actually on birth rates rather than fertility. Immigrant women tend to be of childbearing age, so they shift the age structure of the population, which would raise the birth rate even if their fertility were identical to native women.
The impact on fertility is harder to ascertain. First, research shows that the fertility rate of immigrant women converges with that of the local population. There is therefore a positive, but temporary, ‘mix effect’ of immigration on fertility. Second, the fertility of local women has also increased, so immigration cannot provide the full explanation.
Most studies find that direct financial incentives have little long-term impact on fertility rates. Institutions and policies can, however, have an important indirect impact on fertility: by influencing cultural and societal norms, and by reducing the cost of having children.
Most of the countries where fertility has improved are notable for their relatively egalitarian approach to gender roles, and the ready availability and affordability of childcare.
Whether as a cause or consequence of cultural preferences, childcare in Germany is limited and less flexible. Most kindergartens are only open in the mornings, and even primary schools only run until early afternoon. Childcare provision for children under the age of three is especially lacking.
In France childcare is subsidised and partially tax-deductible, and schools provide supervised activities after school and during school holidays for children from the age of three.
As a result of both societal and institutional arrangements, more mothers work in France - only 36% work full time in Germany, versus 54% in France. The ease of combining work and motherhood goes some way to explaining higher fertility in France, while in Germany highly educated and professional women are increasingly likely to remain childless.
Just as factors such as war or poverty can halt the fall in fertility, other factors may halt its recovery: ‘breadwinner’ norms, labour market rigidity, and even a dysfunctional housing market, which causes people to delay leaving home, getting married or having children. The global financial crisis, and consequent low or no-growth period in many countries, should provide an interesting test of this thesis.
Unfortunately, the positive impact on the dependency ratio of the higher fertility rates in Europe will take decades to filter through.
In the short term, the impact will be marginal, as the small rise in fertility rates - which are still well below replacement levels in most countries, with France the closest - is outweighed by rising longevity, and more babies will actually raise the dependency ratio. The dependency ratio will not benefit until the ‘mini-boomers’ hit the labour force in about 10-20 years’ time.
Looking at France, the chart illustrates the total dependency ratio in two fertility scenarios. In the medium-variant scenario (which we usually use), fertility is expected to rise slowly from current levels of 2 to 2.1 by 2100. This will be too conservative if fertility continues to improve at its recent pace.
In the high-variant scenario, fertility rises to 2.6 by 2100, with most of the improvement in the next 20-30 years. This raises the dependency ratio in the near term, before the mini-boomers enter the workforce, but is lower in the out-years. Because of the extent of rising longevity, though, dependency ratios remain on an upward trajectory.
If we just look at old-age dependency, the effect of the mini-boom is larger. The dependency ratio reaches 38 in the high-fertility scenario by 2100, versus 50 in the medium variant (26 today). Old-age dependency (as opposed to total dependency) has a greater significance for government spending, since old people are much more expensive for the state than children. So there is good news and bad news for governments. The rise in fertility is likely to ease, though not solve, the burden of rising longevity, but most of the divergence happens after 2030, so it will not help the near-term fiscal problems.
For investors, the implications of a new large cohort on consumption and services is important. As the baby-boomers and their children have got older their larger size relative to other generations has had most affect on demand for consumer products and services.
Today, maternity wards and primary schools in London are experiencing a spike in births, from which retailers of children’s clothing, baby food and diapers should benefit. In 10 years’ time, companies targeting teen clothing and technology will also get a boost; in 20 years’ time it will be the likes of Diageo.
Investors can profit from identifying the beneficiaries of demographic trends before the rest of the market, a strategy that has been shown to produce long-term outperformance.