Demographic change is transforming our societies and economies. Its steady creep is gathering pace and force, demanding that countries adapt and innovate if they are to cope with the deep, structural shifts that their populations are just starting to experience.
While the drivers of population change are multiple and uneven, one constant holds true: by 2050 the world’s leading economies are all expected to experience a significant increase in dependency, or the ratio between those not working and working. Unlike other economic forecasts that are estimated with a significant level of uncertainty, the probability that projected demographic changes will take place is very high. In addition, there is not much a country can do to materially alter its demographic course, especially in the span of a couple of decades.
Ageing economies face a stark choice: do nothing and decline or transform and continue to grow. Fortunately, automation and artificial intelligence (AI) can go a long way to counterbalance the shrinkage of the labour force, and the timing of their evolution is opportune. Governments and companies have thus a viable path to growth going forward.
The interplay between demographic pressures and technological advancements is expected to reshape the global economic landscape, presenting both challenges and opportunities for governments, businesses and individuals to navigate. From an investing perspective, it will reshape the investment opportunities across countries and industries, generating new winners and losers.
The sequencing of automation typically adheres to a pattern in ageing economies. First comes the deployment of substitution robots, which directly take the place of workers who are becoming scarce or expensive to employ. Then comes the use of productivity robots, which improve hourly output. In an ageing society, both types of robots have a role to play.
Substitution robots simply sustain production levels with fewer workers, whereas productivity robots have the potential to increase output and generate competitive advantages. Yet worker-replacement robots can be implemented swiftly, while productivity-enhancing systems necessitate additional investments in training, data systems and organisational redesign, which typically take years to yield returns.
The economies that successfully navigate both automation phases are likely to counteract labour shortages with productivity gains, whereas those that remain only in the substitution phase may run the risk of eventual declining competitiveness. The economic policies and company-level investment choices regarding this technological transformation should provide valuable insights into how well individual countries, industries and companies are likely to navigate the crossroads of technological capabilities and demographic challenges ahead.
For all countries undergoing demographic transitions, the key to the successful adoption of productivity-enhancing technologies fundamentally lies in developing the infrastructure and technology diffusion capabilities required to turn automation and AI into productivity-improving engines.
In the context of industrial automation, advancements in robotics and AI are enabling machines to perform an expanding range of tasks. We estimate that AI will achieve peak productivity gains in the 2030s, well in time to counteract some of the most significant demographic challenges faced by ageing economies.
The timing of AI adoption in each country, in relation to its demographic pressures, can significantly alter its productivity outlook. Countries may face temporary declines in productivity during the early stages of AI adoption, corresponding to the lower part of the AI J-curve, before achieving significant gains.
For ageing economies, this poses a dual timing challenge: the demographic headwinds potentially occurring alongside AI’s disruptive phase. Strategic planning and well-timed investment decisions could help the affected economies and sectors navigate the trough of their AI diffusion process, enabling them to subsequently emerge with enhanced automation capabilities and better productivity and growth potential. It is effectively an exercise and a venture in turning the developing demographic challenges into a durable competitive advantage.
"Strategic planning and well-timed investment decisions could help the affected economies and sectors navigate the trough of their AI diffusion process, enabling them to subsequently emerge with enhanced automation capabilities and better productivity and growth potential"
The economic impact of automation relies not only on cost savings but also on demand patterns. Consumption preferences change as populations age. Understanding how these consumption patterns evolve is crucial for identifying investment opportunities for the years to come.
The more automation a sector uses and the more it caters to an ageing population, the greater its growth and productivity potential, and therefore its profitability, so long as the specific economy has the infrastructure in place for a particular technology to be adopted and achieve its potential productivity gains.
Sectors that stand out as potential “winners” from our analysis include housing, based on the importance it gains as populations age and the level of automation that can be applied, in both the production of construction materials as well as the AI- and robotics-related technology used to make housing more conducive to older households. In healthcare, investment opportunities may extend into areas that meet longevity-related needs to prolong the healthy years of the population. The food sector is also likely to offer several potential opportunities.
Adapting to morphing population dynamics will require countries and industries to plan strategically and take well-timed policy and investment decisions. They may need to negotiate trade-offs between robots that can quickly substitute for workers, and investments in more expensive productivity enhancing systems that take longer to deliver results. Those that fail to confront these trade-offs and challenges are likely to struggle. Those that do so successfully are bound to mitigate the consequences of demographic change and unleash new powerful catalysts for growth.
Maria Vassalou
Head of the Pictet Research Institute and former Co-CIO at Goldman Sachs Asset Management.
pictet.com
Pictet Wealth
The Pictet Group, is a Swiss multinational private bank and financial services company founded in Switzerland, in 1805.
pictet.com
