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Aging population will put brakes on economic growth: BMO

Say goodbye to the Baby Boom generation and hello to a slow-growth future.

The aging of Canada's population will mean slower growth for at least the next two decades – one of a host of ways demographics are dramatically reshaping the economic landscape – according to a report being released Friday by Bank of Montreal chief economist Douglas Porter entitled Destiny Dictated by Demography?

"Average growth rates will be slower. Get used to it," Mr. Porter warned. "Canadian real GDP growth has been stepping down the staircase since the 1960s, with each decade slower than the previous one."

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The aging work force is one of the most powerful and underreported economic trends, not just in Canada, but around the world, said University of Ottawa economist and labour market expert Gordon Betcherman. He said demographics help explain the stalling of Japan's economy in the 1990s, Europe's current woes and even the recent slowdown in China and other emerging economies.

"The demographics line up well with slowing economic growth," he explained. "In Canada, with slowing labour force growth and an aging population, slow economic growth is almost inevitable."

That's because economic growth thrives on a combination of productivity, labour and investment. Canada's challenge is that productivity is already weak, its labour force is stagnating, and because older people save less, investment is poised to fall, Mr. Betcherman explained.

Economists have long predicted other troubling consequences of the aging population, including increased demands on the health care system and declining government revenues.

Now, key economic assumptions about everything from unemployment to interest rates are being tossed aside in the face of a new, and distinctly slower, normal.

The Bank of Montreal report, for example, lays out a sobering picture. Canada's economy grew by an average 5.6 per cent a year in the 1960s, when most Baby Boomers were still in school. It slowed to 4.1 per cent in the 1970s, 3 per cent in the 1980s, 2.4 per cent in the 1990s and 2.1 per cent in the 2000s.

BMO estimates that growth will again average 2.1 per cent a year gains in the 2010s, but only because the decade got off to a fast start with the recovery from the Great Recession. Growth may be as slow as 1.5 per cent a year from 2020 to 2030.

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The main culprit for the big GDP downshift? A rapid deceleration in the growth of the working-age population. As the Baby Boom bulge – those born between the mid-1950s to the early 1960s – reaches the traditional retirement age, "the labour force will begin to see a dramatic slowing by around 2020," Mr. Porter predicted. Immigration will offset some of the impact, keeping the labour force from outright shrinking.

Royal Bank of Canada economist Nathan Janzen suggests demographics are already reshaping the labour force. In a report this week, he argued that retiring baby boomers, and not discouraged younger workers, account for the vast majority of the recent decline in Canada's labour force participation rate.

Demographics will play out in other ways in the labour market. Fewer younger workers will mean less unemployment. Since the 1980s, spikes in the jobless rate have become progressively smaller – from more than 13 per cent in the 1980s to 8.7 per cent in the most recent recession.

"Jobless rates of well below 6 per cent certainly look do-able in coming years, without necessarily posing a big risk to inflation," Mr. Porter argues. Canada's jobless rate was 6.9 per cent in April, unchanged from March.

Like many economists, Mr. Porter is ratcheting back predictions of much higher interest rates ahead. He points out that strong investor demand for Canada's recent issue of 50-year bonds (with a yield of less than 3 per cent) suggests rates could stay low for quite some time. We may be in a "brave new world of low-for-long interest rates," he said.

For investors, slow growth and low interest rates means "modest" financial market returns. BMO said a balanced portfolio will generate just 5.6 per cent a year in the next 10 years, compared with 7.8 per cent a year over the past two decades.

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