Ageing society will lead to decades of weak growth, BoE official warns

An ageing society will leave the UK economy permanently weaker over the coming decades, an official at the Bank of England said today.

Speaking at the Resolution Foundation, Michael Saunders, an outgoing external member of the Bank’s monetary policy committee (MPC), warned Britain will “face increasing challenges from demographic change, because population ageing appears likely to produce persistently low workforce growth”.

Life expectancy growth and lower birth rates are set to shrink the size of the UK’s workforce over the coming decades, cutting the economy’s potential output.

The old-age dependency ratio – a measure of the burden the working age population have to carry to support retired people – will increase 18 percentage points over the next five decades, according to the UN.

“These demographic trends imply that, unless there is a sizeable improvement in productivity growth or a trend of rising working hours, the UK is likely to face persistently low potential economic growth in coming years,” Saunders said.

Capacity constraints caused by weaker workforce growth has reduced the pace at which the economy can grow without fuelling inflation, he added.

This reasoning led Saunders to upgrade his assessment of where the so-called “terminal interest rate” – the level which achieves maximum employment and low inflation – lies to two per cent.

“The deterioration in potential output over recent years means that capacity pressures are widespread,” Saunders said.

He hinted he will again back a larger 50 basis point rate rise at the Bank’s next meeting on 4 August, which will be Saunders’s last after he is replaced on the MPC next month by Swati Dhingra. 

He voted with a minority at the last meeting who favoured a bigger hike.

A greater share of the population attending university and hikes to the state pension age have upheld the size of the UK’s workforce between 2009 to 2019.

However, these positive trends are set to fade over the coming decades, “[implying] that the trend in workforce growth will average about 0.3 per cent per year over the next 10 years, less than half the average pace of 2009-19,” Saunders said.