THOMAS SMITH, CFA

Thomas is a partner at
6 HOURS A DAY
Brooksbridge Capital. He
previously worked in the A slow drip of demographic change is revolutionising
natural gas trading
division of Gazprom and
with the fixed income
the human population. 20 years from now youll be
research team at AHL, a $15 billion
algorithmic hedge fund and a division of
living in a world you wont recognise: a world where
Man Group plc. Thomas holds a masters in
financial economics from the University of retirees outnumber new jobseekers and workforces are
Oxford. At Brooksbridge Thomas
specialises in quantitative research and shrinking. The research team at Brooksbridge Capital
developing algorithmic trading strategies.
wants to find out what this means for different
MARK KELLY, CFA
countries, and what this means for economic growth.
Mark is a partner at
Brooksbridge Capital.
He has spent over a
decade in financial
markets where he gained
experience across

equities, derivatives and debt instruments.
Mark previously worked as a portfolio
manager and equities trader at Merrion
Capital and Dolmen Securities in Dublin.
At Brooksbridge Mark focuses on
investment strategy and managing the
firms proprietary trading strategies.
ROBERT POWER
Robert is a partner at
Brooksbridge Capital. He
has over 35 years of
experience in financial
services. He was
previously Deputy
Managing Director of Cornmarket Group
Financial Services and is currently an
independent non-executive director at KBC
Bank Ireland plc as well as chairman of the
educational charity Global Schoolroom.
Robert holds a degree in law from Trinity
College Dublin and a masters in economics
from the London School of Economics. At
Brooksbridge Robert focuses on strategic
planning and business development.
Contact
Linstead House
9 Disraeli Road
London SW15 2DR
+44 203 129 5910
contact@brooksbridge.com
www.brooksbridge.com
T
oronto, the largest city and com-
mercial capital of Canada, has
an unprecedented issue tearing
through its municipal politics. No, its
not Rob Ford, the citys infamous, crack-
smoking mayor; hes retired now. The
new issue is school closures. Across the
city there is a vast surplus of elementary
schools1 which are costly and inefficient
to run. But closing a single school has
proven politically impossible. Genera-
tions of sentimental alumni start peti-
tions, and parents, who no doubt
factored proximity of schools into their
home purchase decision, storm school
board meetings.
Much of Toronto was built in the 1950s
and 60s, when the post-war baby boom
meant schools couldnt be constructed
fast enough. The swelling ranks of youth
were often crowded into portables;
movable sheet-metal structures, big
enough for a single classroom, that
would turn school fields into
educational trailer parks.
But its not the 1960s anymore, and the
times they are a changin. In recent
decades every developed country in the
world Canada being a very typical, not
special case has been transformed by
the 6 Hours a Day phenomenon.
The 6 Hours a Day phenomenon is the
slow drip of demographic change that is
revolutionising the human population;
the combination of two powerful forces:
living longer and having fewer.
For the last 60 years, across the globe,
human life expectancy has been on a
march ever-upwards. In 1955 a person
born into a high-income country would
live on average to 64; today that number
is 79. An increase of about 2.5 years
every decade, or 6 hours a day.2
Running in parallel has been another
trend in our biological averages: having
fewer children. Having fewer is a direct
result of starting later. Wherever they
have been given the opportunity, women
have been opting to spend more time in
education and at work, pushing back the
time they get married and the time they
have children. This change has occurred
nearly everywhere, particularly strong in
some Western European countries where
the average age of a woman when she
first gets married has increased by about
2.5 years per decade, or 6 hours a day.3
 2

Living longer and having fewer are

having countless effects on society, but WHAT DOES THE
there is one question that interests us FUTURE LOOK LIKE?
here: what does this mean for

T
economic growth? he following bar plot shows
how the WASP will change over
The authoritative source for the next 20 years for 180 coun-
demographic data is the UN World tries. The height of each bar is the fore-
Population Prospects database, which cast change in WASP between 2015 and
contains historical data since 1950 and 2035.5 The width of each bar is the cur-
forecasts out to 2100 for thousands of rent GDP, which gives you an idea of
demographic indicators for 230 distinct each countrys relevance to the world
countries and regions and it is updated economy.6 The countries go from rising
every 2 years. Its about 48 million rows WASP on the left, to falling WASP on
of data if you want to download the the right, and the 25 largest economies
THERE IS ONE whole thing. are labelled.
QUESTION THAT
INTERESTS US 48 million data points can obviously be Some patterns should already be hitting
cut and sliced many different ways. But your eyeballs. Most countries, GDP-
HERE: WHAT DOES since were interested in economic wise, are below the line. In total the
THIS MEAN FOR growth the most relevant number for us falling-WASP countries count for about
is the Working-Age Share of the of current world GDP. In here youll
THE ECONOMIC Population. The WASP is generally find all of the G7, all of the G8, 13
GROWTH? defined as all people aged 15 to 64 as a members of the G20 and 31 of the 34
proportion of the total population.4 It OECD members. The developed
usually lies somewhere between 50% countries (Europe, North America,
and 80% and is a very useful indicator Developed Asia) all have falling WASPs,
of a countrys economic potential. A with the biggest declines in Hong
high WASP country generally has a Kong, South Korea and Singapore (not
higher proportion of people in the all labelled). The very wide bars
workforce and thus a higher GDP. A pointing down tell you that the worlds
low WASP country generally has a largest economies (China, America,
higher proportion of young children or Japan, Germany) will all see their
retirees and thus a lower GDP. workforces shrink.

The Aging Economy

Change in WASP 2015 to 2035 Medium Variant Forecast - %
(Source: UN World Population Prospects)

6 HOURS A DAY GDP - USD Billions Purchasing Power Parity 2014 (Source: IMF)
 3

(If you are an appropriately sceptical Amongst the falling WASP countries
person and youre a bit weary of there is still a lot of diversity. For
believing any of this data, be sure to read Continental Europes biggest economies
the appendix Should I believe any of this?) (France, Italy, Germany) and Japan, not
only are they set to fall but they all lie to
On the very far left the tall skinny bars the left, so their WASPs are already quite
tell you that all the countries with the low, barely above 60%. The big Asian
fastest growing workforces are very small economies (China, Thailand, South
economies, mostly in Africa. All of the Korea) all lie to the right, so they
rising-WASP countries are emerging currently have very high WASPs, and
markets where birth rates are falling. even after their large declines they will
With fewer children in 2035 the number still be relatively high. The Anglo
of people of working-age will be a higher countries (Britain, Canada, Australia,
proportion of the whole population. But America) currently lie tightly packed in
not all emerging markets are the same. the middle and should still be tightly
From the BRIC countries the 4 largest packed in the middle 20 years from now;
emerging markets B, R and C are after they fall to the level Japan is at today.
falling; India is the only exception.
1990 WAS
THE YEAR Because the bar chart only shows the
JAPANS WASP change in WASP some important HOW MUCH DOES
patterns are hidden. The following THIS MATTER?
PEAKED AND scatterplot shows the level of the WASP
STARTED TO
T
in 2015 against the forecast level of the he relationship between demo-
WASP in 2035 for the 25 largest graphics and economic growth
DECLINE economies. Here you can see more than is kind of obvious from a theo-
just the forecast change; you can see retical perspective. Not surprisingly
where it is today and where it will reach many economic researchers have looked
in the future. A country expecting no at the question, and it turns out that
change will lie precisely on the diagonal this kind-of-obvious-from-a-theoretical-
blue line (Turkey/TUR). A country perspective relationship actually has a
expecting a rise will be above the line lot of data to support it. In almost every
(Egypt/EGY). And a country expecting a case of exceptional economic growth in
fall will be below the line (Japan/JPN). the last 70 years Japan, Germany,

The WASP Swarm

2035 Working-Age Share of the Population - %
Medium Variant Forecast

6 HOURS A DAY 2015 Working-Age Share of the Population - % (Source: UN World Population Prospects)
 4

South Korea, China, Ireland re- The Flip is crucial. It is the point where
searchers have found that a rising WASP the 6 Hours a Day phenomenon stops
was responsible for something between pushing growth up and starts dragging
and of their total growth.7 it down. Once that population bulge
makes its way through working-age and
In each case the effect began when the gets to retirement the WASP has to go
birth rate fell; as one bulging cohort left down; and retirees with longer and
childhood and entered the workforce it longer life expectancy push the WASP
was replaced by a smaller cohort of down even further.
children behind it (see Toronto school
system). With a population bulge going Economic research on demographics
through the workforce, GDP went up. often uses a framework that leads to a
Economists dubbed this effect the distinctly rosy view. The framework:
demographic dividend; and in recent find a country that had exceptional
decades, rich countries have been economic growth and then answer the
THE FLIP IS cashing it in.8 question how much of that growth was
due to a rising WASP? Not surprisingly
CRUCIAL. IT IS THE Japan had incredible growth in the this generally finds that demographic
POINT WHERE THE decades after WWII as families had change is a big help to growth.
fewer children and the WASP took off,
6 HOURS A DAY eventually making it the worlds second But it doesnt tell us how much a falling
PHENOMENON largest economy. But that time has WASP can drag growth down. When
STOPS PUSHING passed. Japans bulge of workers is now the WASP changes by 1% how much
leaving the workforce and that smaller does economic growth change?
GROWTH UP AND cohort behind them has to support a
STARTS DRAGGING bulge of retirees; retirees with ever- The following plot shows a simple
growing life expectancy. Since 1990 regression between the change in WASP
IT DOWN Japans economic growth has been and Real GDP growth over the last 35
dismal. Perhaps not coincidentally 1990 years for 180 countries. The cloud of
was the year Japans WASP peaked and data points around the regression line
started to decline.9 tells you that a lot of things affect GDP
growth besides the WASP, but the slope
Japan has been the first country to ride of the line tells you that the WASP is
the WASP all the way to the Flip. still damn, damn important.

Real GDP Growth regressed on Change in WASP

Annual Real GDP Growth - % (Source: IMF)

6 HOURS A DAY Annual Change in WASP - % (Source: UN World Population Prospects)


This data says that over 1 year if the
WASP rises by 1%, going from say
65% of the total population to 66%,
then annual Real GDP growth will be
on average 1.9% higher. That is a lot.
(And thats a very statistically
significant result.)
This supports what researchers have
found for China, Ireland et al: a rising
WASP is a great upside for growth.
Unfortunately, 1.9% is also the
downside. If the WASP falls by 1%,
economic growth will be about 1.9%
lower on average. And this is what we
can expect to see for the s of world
GDP with falling WASPs.
SINCE 2011 CHINA HAS SEEN A
DRAMATIC GROWTH SLOWDOWN. PERHAPS
NOT COINCIDENTALLY 2010 WAS THE YEAR
CHINAS WASP PEAKED AND STARTED TO
DECLINE
This model is quite simple but its not
wildly inaccurate. Academic researchers
that have tried to estimate the same
number across different countries,
different time periods and different
specifications have got estimates
everywhere between 0.5 and 3.0, most
often falling somewhere between 1.25
and 2.0, and almost always very
statistically significant. Our very
statistically significant estimate of 1.9 is
pretty much the same.10
For a country like South Korea, with a
WASP that is forecast to fall about 13%
over the next 20 years, we can expect its
demographics to drag down its growth
about (-13/20 * 1.9) -1.24% per year. -
1.24% is how much their growth
should swing compared to a
hypothetical scenario where their
6 HOURS A DAY
5
WASP change was zero. But South
Koreas recent history has actually been
a scenario where their WASP change
was positive. So the swing between
what we observed in the nearby past
and nearby future should actually be
bigger than this -1.24% estimate.
Thats the Flip.
THE WASP THAT
STUNG THE DRAGON
S
ince the early 1980s China has
been the heart of world economic
growth with its GDP regularly ex-
panding more than 10% per year. This
is largely thanks to its rising WASP
which has soared from 55% to 74%.
China is interesting because its 6 Hours
a Day phenomenon was largely govern-
ment mandated the controversial One
Child Policy, introduced in 1980. But
of course, a drop in birth rates means
that several decades later (i.e. right now)
there will be more retirees leaving the
workforce than young people joining it.
Since 2011 China has seen a dramatic
growth slowdown. Perhaps not coinci-
dentally 2010 was the year Chinas
WASP peaked and started to decline.11
Theyve passed the Flip.
All of that economic research on
demographics left us with some overly
rosy ideas. Yes, when a bulge of young
people enter the workforce and then
have fewer children the WASP goes up,
and yes, there is a growth boom. The
demographic dividend. But once that
bulge makes its way to retirement, the
WASP has to go back down, and
growth has to fall. Its not really a
dividend if you have to pay it back.
Maybe the term should be replaced
with something like the demographic
transfer payment.
October 2015
Thomas Smith, Mark Kelly and Robert Power

APPENDIX: SHOULD I BELIEVE ANY OF THIS?
You may have never studied it, but there
is probably one thing you know about
economic forecasting: it is nearly always
wrong. Your scepticism is warranted,
but we do want to give a few caveats,
explanations and justifications for why
we think this data is still worthwhile.
Looking at WASPs there are three major
variables that could ruin our forecasts:
the birth rate, migration and the
retirement age.
IF YOURE
FAMILIAR WITH Your scepticism about a forecast should
be proportional to its time horizon. In
POLITICIANS LIKE the news youll often hear quotes that
DONALD TRUMP OR sound something like In 2050 Europe
will have more people over 80 than
THERESA MAY THEN below 10. Knowing how many 10 year
WE SHOULDNT olds there will be in 2050 is pretty
NEED TO CONVINCE unknowable since it depends on the
birth rate after 2040 which, who
YOU THAT knows, could be plummeting or could
INCREASING be skyrocketing. But with our forecasts
here we are only looking out 20 years,
IMMIGRATION 500% so birth rates dont matter too much.
IS POLITICALLY For a person to be of working-age by
2035 they have to be born by 2020; so
IMPOSSIBLE a baby-boom could only change our
outlook if it happens in the next 5
years. Not likely. If any baby-boom
occurs between 2020 and 2035 there
will be more children in 2035, and the
people of working-age will actually be a
smaller proportion of the total
population, exacerbating all our
forecasts for falling WASPs.
The one factor that people often think
is a big wildcard is immigration. This of
course cant affect the whole planet, but
it could affect any one individual
country. Migration is very hard to
predict, but numerically, in terms of
sheer numbers of people, migration is
miniscule compared to the changes
wrought by the 6 Hours a Day
phenomenon. Even for one individual
country it is highly unlikely that
migration could reverse things.
For every variable in the UN World
Population Prospects database there are
several different forecasts, which use
6 HOURS A DAY different assumptions about birth rates,
6
mortality rates and migration.12 For all
the plots here we are using the Medium
Variant forecast, which for every
country uses their medium estimates
for birth and mortality rates, and
assumes that their current levels of net-
migration continue forever into the
future. There is also a Zero-Migration
Variant which uses the same middle
estimates for birth and mortality rates,
but assumes that net-migration is zero
forever. All of our plots and statistics
can be recalculated using the Zero-
Migration Variant and the results do not
change meaningfully. (Were happy to
share these if youre interested.)
To offset the coming wave of
retirements across the developed
countries, immigration numbers
would have to go up about 5 times
from their current levels.13 If youre
familiar with politicians like Donald
Trump or Theresa May then we
shouldnt need to convince you that
increasing immigration 500% is
politically impossible.
And of course workers arent that easily
interchangeable; new immigrants need
to learn the language and gain
qualifications. After thousands of
German-speaking engineers retire, there
is no other country in the world that
has a vast pool of fully qualified,
German-speaking engineers ready to
replace them.
In countries like Japan and South
Korea, with already high population
densities and very little experience of
immigration waves, net migration
would have to increase by such an
absurd multiple, a number so
completely impossible to achieve, it is
not really worth your time to read any
more about it.14
So if these WASP forecasts are robust
to birth rates and immigration, what
could ruin them? The retirement age.
The retirement age actually covers
two related ideas: the state pension age,
and the age at which people actually
stop working.

Footnotes
1 Howlett (2015)
2 UNWPP Life Expectancy at Birth (e0)
- Both Sexes
3 UN Department of Economic and Social
Affairs Population Division (2014, Pg 7)
4 The UNWPP actually provides the Total
Dependency Ratio, which is:
TDR = (pop_below_15 + pop_above_64) /
pop_15_to_64. The TDR can be converted
to the WASP by: WASP = 1/(1+TDR)
5 UNWPP - Total Dependency Ratio 1
6 IMF World Economic Outlook
7 Bloom et al. (1997, Pg 7), (2001, Pg 28),
(2003, Pg 14)
8 Lee (2006)
9 UNWPP - Total Dependency Ratio 1
10 Bloom et al. (1997, Pg 34), (2001, Pg 38, 41,
44), (2007, Pg 37), (2010, Pg 19)
11 UNWPP - Total Dependency Ratio 1
12 UN Department of Economic and Social
Affairs (2012, Pg 15-38)
13 Magnus (2008, Loc 1407)
14 Bloom (2001, Pg 32), Magnus
(2008, Loc 1617)
15 Magnus (2008, Loc 2419)
16 Pensions Act (2014, Sect 26)
17 Pensions Act (2007, Sect 13)
Risk Warning
Brooksbridge Capital LLP (FRN 576345) is an
Appointed Representative of Sturgeon Ventures LLP
(FRN 452811) which is authorised and regulated by the
Financial Conduct Authority (FCA) of the United
Kingdom. Brooksbridge Capital LLP can only deal with
sophisticated investors who are professional clients or
eligible counterparties under the Rules of the FCA.
This document is not intended to be viewed as
investment research under the Rules of the FCA.
References to specic securities are included for the
purposes of illustration only and should not be
construed as a recommendation to buy or sell these
securities or investment instruments. Content in this
document, including news, quotes, data and other
information, is provided by Brooksbridge Capital LLP
for your personal information only and is not intended
for trading purposes. Content in this document is not
an invitation or inducement to engage in investment
activity and is not appropriate for the purposes of
making a decision to carry out a transaction or trade
in any of the investments mentioned in this document.
Nor does it provide any form of advice (investment,
tax, legal) amounting to investment advice, or make
any recommendations regarding particular nancial
instruments, investments or products.
Although Brooksbridge Capital LLP uses all
reasonable skill and care in compiling this report and
considers the information to be reliable, no warranty
is given as to its accuracy or completeness. Any
forward-looking statements contained in this
document are subject to signicant uncertainties and
may prove to be inaccurate or incorrect. Any
information, opinions or forward-looking statements
in this document are subject to change without
notice. No reliance may be placed for any purpose on
any of the information, opinions or forward-looking
statements contained in this document.
Access to certain investments is often restricted by
the laws of certain jurisdictions and you are required
to determine whether you are permitted to access
them. Past performance is not a reliable indicator of
future performance. The value of investments can
decrease as well as increase. Any investments you
make can result in nancial loss.
7
To some extent governments have number; people retire at different times
caught on to the WASP problem they and often go through a period of
are colliding with. Since 1990 nearly working part-time.
every OECD member country has cut
state pension benefits and/or raised Numerically a delayed retiree has a
their state pension age.15 Unfortunately, bigger impact on the WASP than a
this has generally been done with working immigrant because they
traditional government caution. The increase the workforce without
UK has announced that their state increasing the total population. And, to
pension age, currently at 65, will the extent they are keeping
increase to 67 but only between now accumulated skills and experience in
and 2028.16 (There are further plans to the workforce, a delayed retiree means
raise it to 68, by 204617). more for the economy.
Raising the state pension age has the Over the next 20 years, with rising
bonus effect of convincing people to pension ages and slower economic
stay in work longer. The age at which growth, we will likely see retirement
people stop working is actually the ages drifting up out of sheer
important number. All our forecasts coincidence, maybe it will hit a rate of
revolve around the implicit assumption 6 hours a day. While this would be
that the day you hit 65, you stop very bad for the accuracy of our
working. Obviously in reality, forecasts, it would be very good for the
retirement age is a very imprecise world economy.
Bibliography
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