The 3D Reset: How demographic shifts will impact global economies and markets

Three trends impacting global economies, markets and businesses are reshaping the investment landscape. Expect decarbonization, demographics and deglobalization—which we call “The 3D Reset”—to maintain inflationary pressure over the coming years, bringing higher borrowing costs and greater volatility in their wake. But as central banks, businesses and consumers adjust to these shifts, investors who understand their implications can adapt their approaches to fit this new environment.

The second piece in this series explores changing demographics. In short, forecasters predict global population growth to decline and labor force growth to slow over the coming decade, reducing the number of available employees and pressuring employers as they compete for talent. We believe this scarcity of workers will have a huge impact on inflation and economic growth as wages rise.

Numbers strongly suggest slimmer pickings for employers. Somewhere around 2028-29, global population growth will shift negative. Data projections show populations in major economies and regions getting older, leaving fewer people of working age. In the U.S., as elsewhere, a smaller number of workers will support a growing number of retirees.

The labor force participation rate has fallen both in the U.S. and the U.K. since the pandemic began. In December, there were 11 million job vacancies in the U.S. compared against just 5.7 million unemployed people. The Bureau of Labor Statistics in November projected the U.S. labor force participation rate to decelerate, declining to 60.1 percent in 2031 from 61.7 percent in 2021. The BLS also predicted that labor force growth, at an expected 0.5% annual rate between 2021 and 2031, will also be slower, likely restricting overall economic growth.

The U.S. isn’t alone. The number of workers in the eurozone, Japan and China will also decline, mostly due to falling fertility rates.

With fewer workers, businesses should expect to pay more in salaries and for investments in productivity-boosting technologies, aggravating inflation. Workers will demand bigger pay increases to alleviate the rising cost of living. And businesses won’t be able to offset these costs as easily through offshoring and migration, as these have become less attractive or politically feasible options.

Tilting wage-negotiating power back toward workers will heap inflationary pressure on politicians and central bank policymakers. As central banks prioritize inflation and drive up real interest rates, expect investors to weather greater volatility in the face of higher borrowing costs. Meanwhile, employers will likely struggle to find enough, or the right, workers. 

We believe companies will therefore invest in technology that increases productivity to protect profit margins, leaning more on robot and artificial intelligence use, where possible. For investors, this could mean rich opportunities for active equity managers and private equity strategies that invest in these productivity-enabling technologies.

To be sure, demographic shifts will create winners and losers, opportunities and pitfalls. Meeting the coming challenges will require a different mindset—we’re not calling it a reset for nothing. Businesses that can anticipate these changes and adapt quickly will emerge well-positioned for the new world. Similarly, investors who adjust their approach and can identify these successful businesses will be better positioned to weather the coming transition.

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