A nuanced picture for real assets’ demand

Demographic trends throughout the eurozone, between member states and within nations, vary markedly. At the macro level, Europe’s working-age population is shrinking, which poses challenges to sustain economic growth, the labour force and productivity.

In Germany, the eurozone’s largest population and real assets investment market, the demographic trends are most similar to those of Japan. While Germany has previously experienced patches of negative population growth (eg, in the historic East German era), the Covid-19 pandemic was a true pivot point: its working-age population started to shrink in 2020 and its total population is projected to start falling this year. Germany’stertiary education cohort is also projected to start falling this year. By contrast, its retiree cohort is projected to continue to grow so that the working age population will fall to below 50% of the total population in 2031.

In France, Italy and the Netherlands, the same pattern also exists, but is worse. In all three markets, the working-age population had already begun to shrink in the 2010s. In Italy, the total population also began to shrink in 2018, although it is not projected to do so in France and the Netherlands until the 2040s. But before you get too optimistic, during the pandemic, France’s working-age population slipped below 50% of its total population.

Impact on real assets
Given the demographic picture, it is unsurprising that the eurozone economy is increasingly characterised by low trend GDP growth, low trend interest rates and low trend inflation. It seems positioned between the US, UK, and Australia on one hand and Japan on the other, with a clear direction of travel. From a demographic perspective, the eurozone is categorised by ageing populations and shrinking working-age populations, suggesting that a combination of sectors that has until now been successful in Japan would be attractive here as well: logistics and residential that service the major urban population centres that are expected to continue to attract young workers (eg, Berlin), and increasing opportunities in later living and
nursing care.

UK: demography
The UK stands in sharp contrast to the eurozone insofar as its population is forecast to continue
growing from 68 million. The United Nations (UN) forecasts that the UK will overtake Germany’s population in 2074. However, peak population growth years have now passed as the number of migrants coming from Central and Eastern Europe has fallen post-Brexit. Since Brexit concluded, the UK has been losing EU migrants, with London particularly impacted by outward migration as service-sector jobs dried up during the pandemic. It remains to be seen how far these trends will be reversed post-pandemic.

The UK’s shifting attitude toward migration and indeed the high amplitude public policy swings resulting from its political system have led to a less stable set of population trends by age cohort than most other markets. For example, the domestic tertiary student age cohort fell outright throughout the 1990s, but this coincided with higher education reform that markedly increased the proportion of that cohort actually entering higher education, masking the underlying trend. And then the age cohort experienced rapid growth in the 2000s, only to fall again in the 2010s. The UN projects that it will continue to fall into the late 2020s, when the cycle turns positive again.

The working-age population is still increasing in the UK, but is expected to decrease in the late 2020s before turning weakly positive again. We would argue that the UK population projections for the 2020s are especially difficult given the structural break of Brexit and unclear immigration policies thereafter. As with most other major markets, the retiree population continues to grow at a rapid pace thanks to longer life expectancy. The working- age population is forecast to fall below 50% of the total population in 2033, and the proportion of all retirees who are over 80 is expected to increase gradually from 27% in 2022 to 38% in 2050.

Economy and impact on real assets
The UK economy is one of the most difficult to forecast over the next decade given the twin structural breaks of Brexit and the pandemic. It is especially hard to see how attractive the UK will be to inward migration from the EU. For example, will CEE workers who left when their jobs vanished during the pandemic return? That said, despite higher frictional costs of trade, the UK is forecast to continue to experience higher trend rates of GDP growth, and higher trend inflation and interest rates thanks to continued faster population growth offsetting weak productivity growth. The key question, as in other major markets, is how to fund the increasing burden of social care and nursing provision for the elderly. The UK lacks the kind of compulsory superannuation system seen in Australia or Japan, and is overly reliant on taxation out of current income. With its working age population still growing, the urgency of resolving this is not as great as in other major markets, but will soon be pressing.

From a demographic perspective, the UK is an interesting combination of ongoing growth and slower
ageing than its major European counterparts. The real uncertainty comes from assessing the attraction of London as a destination for both external and domestic migrants and therefore the real assets demand in its major market. The receptiveness to private sector funding of the real assets infrastructure means that there are attractive opportunities for providing next-generation assets.

US: demography
The US stands out as one of the few major markets globally with a positive demographic outlook. Neither the total population or the working-age population is forecast to fall during the forecast period. The working-age population is not forecast to slip below 50% of the total population until 2047, and while the population is ageing, most retirees will remain below the over-80 cohort. Even the tertiary education cohort is projected to experience positive growth in the 2020s.

Economy and impact on real assets
Investors should expect the US to continue to experience relatively high economic growth compared to other OECD markets, as well as higher trend interest rates and inflation. As with Australia, the US is one of the few markets with sustained structural tailwinds across all age cohorts, opening up the full range of real assets investment opportunities.