Europe is facing a looming demographic crisis that could have severe implications for its economy, according to a grim prediction by Morgan Stanley.
Morgan Stanley warns that the aging population in Europe could reduce the Eurozone’s GDP by 4% by 2040 due to people living longer and declining birth rates.
The bank forecasts a significant GDP loss as Europe’s working-age population is projected to shrink by 6.5% by 2040, leading to reduced output and tax revenues.
Italy is likely to be hit the hardest by this decline, with an aging population expected to decrease the country’s GDP by around 6% over the next 15 years. France and Germany will also see declines, albeit less severe than the EU average.
Countries heavily reliant on the hospitality sector are expected to feel the impact on GDP more acutely, as fewer people fill these roles and an older population increases the tax burden.
According to Morgan Stanley, the UK is the only country set to experience GDP growth due to shifting demographics, adding four percentage points to its GDP by stabilizing its working-age population. However, productivity remains a concern for the UK.
Addressing Europe’s Population Crisis
Countries in the West are grappling with a declining working-age population, a trend already seen in Japan and South Korea.
The topic is increasingly discussed in European boardrooms, with mentions of “aging population” rising sharply in recent years. Morgan Stanley found that nearly 5% of C-suites are now discussing the issue.
Policymakers have limited options to combat the demographic time bomb. Morgan Stanley suggests two main solutions: a baby boom or increased migration.
While a baby boom is unlikely, policies to support childcare and boost net migration could help stabilize fertility rates. Increasing migration and female workforce participation are seen as the most effective ways to address the economic growth gap.
Morgan Stanley acknowledges that raising retirement age or increasing working hours for the remaining workforce are less appealing options. Doing nothing, however, could lead to disastrous consequences for Europe’s economy.
