Fertility: childcare costs exacerbate the demographic drought

The Covid-19 baby bust — marked by falls of up to a fifth in December 2020 birth rates — was shortlived. But a reversion to pre-pandemic trends still leaves about half the world’s population below the replacement rate of fertility. The economic consequences are a big issue for politicians and portfolio managers alike.

For equity investors, ageing populations present opportunities as well as risks. Rising demand for healthcare and automation should benefit companies such as Japan’s Fanuc and Germany’s Siemens. Even nappy manufacturers like Japan’s Daio Paper, Nippon Paper and Unicharm can adapt to demographic trends. Sales of adult diapers in Japan have exceeded those for babies since 2011, says Jefferies.

Sovereign bond investors are increasingly mindful of demographic risks. Rapidly ageing populations increase public spending on health, social care and pensions, while the tax burden is spread over fewer workers. Rating agency Fitch calculates that the impact of ageing costs on sovereign ratings could result in a 10.5-notch downgrade for Slovakia, the most extreme case, by 2070 assuming no policy changes.

Supportive states have relatively high birth rates Scatter plot showing Total fertility rate (2019) compared with public spending on child benefits, parental leave and childcare support as % of GDP (2017) G0786_22X

Governments do have some levers to pull, though not all factors are easily addressed. Fears over climate change are impacting fertility rates quicker than any preceding trend in the field of fertility decline, Morgan Stanley said last year.

But helping parents financially is one obvious way to lower barriers. The high cost of bringing up children gobbles up a big share of disposable income in some countries, particularly in Asian countries such as Japan, South Korea and China.

Total cost of raising a child to 18 years Bae chart As a multiple of per capital disposable income, 2021  G0786_22X

Those who become parents often stop at one child, as bedroom sharing and hand-me-down clothes do not cut costs by much. Three-children families shave the per-child costs by just a quarter, versus those who have two, reckons the US government.

Countries that provide generous financial support appear to have more births. Nordic countries, noted for their gender equality and generous welfare states, have birth rates that are close to replacement levels. Providing financial support for childcare, making it easier to combine work and parenthood, is particularly effective, according to the OECD.

For all the many rewards that children bring, they are financially draining. They bring economic benefits, but these are not reaped by the parents who bear the brunt of the costs. Boosting the former may require more sharing of the latter.

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