The Financial Times on Wednesday reported that many of the world's wealthiest nations must significantly boost productivity to sustain historical improvements in living standards as birth rates continue to decline sharply.

A study by McKinsey has revealed that countries such as the UK, Germany, Japan, and the US would need to see productivity growth double compared to the last decade to maintain the same per capita GDP growth observed from the late 1990s to 2023. In France and Italy, the report indicates, productivity would need to triple, while Spain would face a fourfold increase to achieve similar results by 2050.

The findings reveal how declining birth rates threaten to disrupt economic stability in advanced economies, as the working-age population shrinks and an aging population increasingly depends on it. Without proactive measures, "younger people will inherit lower economic growth and shoulder the cost of more retirees, while the traditional flow of wealth between generations erodes," warned Chris Bradley, director of the McKinsey Global Institute.

Demographic Decline

Globally, governments are grappling with a demographic crisis exacerbated by rising housing and childcare expenses, alongside shifting societal norms, including fewer young adults forming relationships. Currently, two-thirds of the global population resides in countries where birth rates fall below the replacement threshold of 2.1 children per woman. Populations are already in decline in several OECD nations, including Japan, Italy, Greece, China, and parts of Eastern Europe.

"Our current economic systems and social contracts were built around decades of population growth, particularly in working-age groups that drive economic expansion and sustain longer life spans," Bradley noted. "This calculus no longer holds."

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To address these demographic challenges, a combination of strategies is needed, according to the report. Bradley emphasized, "It's going to have to be a mix of injecting more young people into work, longer working lives, and hopefully productivity."

McKinsey calculated that declining working-age populations could reduce GDP per capita in Western Europe by an average of $10,000 per person over the next 25 years. The consultancy highlighted Japan as an example of extended workforce participation, where 26% of individuals over 65 remain employed, compared to 19% in the US and just 4% in France. However, despite these efforts, Japan's per capita GDP growth over the past 25 years has reached only about a third of US levels.

"The demographic drag is inexorable and severe, and when it hits, boosting productivity growth becomes even more relevant," the report stated.

Productivity Crisis

For Germany to maintain past living standards, workers would need to add over five additional hours to their weekly schedules, or the proportion of people in the workforce would have to rise nearly 10 percentage points from its current level of about 80% among individuals aged 15 to 64. While the UK and US face slightly less daunting demographic pressures, countries like Spain and Italy require double-digit increases in labor force participation.

The report also pointed to the slow progress in leveraging technological advancements such as generative AI and robotics to meaningfully enhance productivity. Europe, in particular, has experienced stagnating productivity since the pandemic, widening an existing gap with the US.

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Echoing similar warnings from the OECD, the report calls on governments to prepare for a future shaped by low fertility and demographic shifts, which risk undermining the prosperity of future generations.