Andrew Bailey tells old people that they are to blame

Introduction

In a recent conference in France, Andrew Bailey, the Governor of the Bank of England, issued a stark warning about the impact of Britain’s ageing population on the economy. According to Bailey, the changing demographics, combined with stagnant productivity since the financial crisis, pose two significant challenges that will affect interest rates for decades to come. He argued that these long-term issues might have a more profound and lasting impact on the economy compared to short-term crises like the war in Ukraine and the Covid pandemic, which have driven inflation to unprecedented levels.

The Demographic Challenge

One of the main concerns highlighted by Bailey is the ageing population. The declining birth rate is leading to a significant increase in the number of people aged over 85, which is projected to almost double from 1.7 million in 2020 to 3.1 million by mid-2045. This demographic shift will have several implications for the economy. Firstly, as older people tend to spend less, it is likely to decrease demand in certain sectors. Moreover, a larger share of workers’ income will be allocated to paying for the care of the elderly, further impacting consumer spending and investment.

The Japanese Example

Bailey pointed out that Japan, a country further along the path of an ageing population, has already experienced economic near-stagnation, accompanied by lower inflation and interest rates. This serves as a warning to countries like the UK, where the demographic shift is still in its early stages. It becomes clear that addressing the challenges of an ageing population will require innovative policy measures to sustain economic growth and stability.

Productivity Growth and its Enigma

The other major issue raised by Bailey is the persistent problem of stagnant productivity growth since the financial crisis. While its consequences are well understood, the root causes of this stagnation remain a complex and elusive subject. The lack of productivity growth hinders economic expansion, making the economy more vulnerable to other shocks that could lead to inflationary pressures.

Central Banks’ Role

Despite the gravity of these challenges, Bailey emphasized that central banks cannot be solely responsible for resolving these issues. While they must consider these long-term shocks in their efforts to control inflation and maintain financial stability, addressing demographic shifts and productivity growth requires comprehensive public policy interventions beyond the central banks’ scope.

Inflationary Pressures and Target Rate

The current inflation rate in the UK stands at a concerning 8.7%, more than four times the target rate of 2%. However, Bailey rejected the idea of raising the inflation target to ease pressure on central banks, fearing that such a move might disrupt expectations and create uncertainty in the economy. Instead, he remains optimistic that the Bank of England will succeed in bringing inflation back to the target rate within the same timeframe as the European Central Bank.

Conclusion

The warning issued by Andrew Bailey about the long-term impact of Britain’s ageing population on the economy and its potential implications for interest rates deserves serious consideration. Addressing these challenges will require a concerted effort from policymakers and stakeholders across various sectors. Navigating the demographic shift and tackling the productivity growth puzzle will demand innovative solutions to ensure economic growth and stability in the years ahead. Central banks must carefully consider these long-term shocks while fulfilling their core objectives of controlling inflation and safeguarding financial stability. The road ahead may be challenging, but with the right strategies, the UK and similar countries can navigate these challenges successfully.