Birth Bonanza to Create Economic Edge Over Germany: U.K. Credit

The U.K. may be giving birth to a stronger economy.

Having had the slowest recovery from recession in a century, Britain is set to outperform the rest of Europe as a rising population fuels growth and helps the country cope with the looming retirement of “baby boomers” born after World War II, according to James Knightley, a senior economist at ING Bank NV in London.

“The U.K. is going to be an investment destination of choice if you’re looking for growth,” Knightley said in a telephone interview. “You’ll have a growing population of working-age people and the economy will be growing reasonably quickly, so you know you’ll get your money back.”

Rising numbers of young workers mean more taxes, limiting the need of future governments to borrow to pay for the pensions, health care and infrastructure a growing population requires, according to Knightley. Germany, where the birth rate has slumped, confronts a shrinking workforce and more retirees. Thirty-year U.K. government bonds yield 3.6 percent, 84 basis points more than equivalent German debt, and the gap has been narrowing since July.

“It’s good news for the U.K. tempered by some of the problems it implies, given there’s not a lot of money around,” Knightley said. “You’d still rather be in the U.K. situation of having to deal with a growing economy than be like Germany where the economy is shrinking and there’s a legacy of debt.”

Workers Needed

The need to ensure a steady stream of workers is vital in most advanced economies. In Britain, 3.3 million people are set to become pensioners in the next five years, Knightly says.

Based on European Union estimates, the U.K. will overtake Germany as the populous European nation by 2045, and it could also be the region’s largest economy before then, according to Knightley. Driving the increase is a surging birth rate, immigration and increasing numbers of Britons putting off retirement.

Government data show Britain witnessed the most births since 1972 in the year through June 2012. That and the continued arrival of foreign workers caused the population to rise 419,000, or 0.7 percent, to 63.7 million. Projections from the Office for National Statistics point to it reaching 73.2 million by 2035 and 80 million in 50 years, according to Knightley.

Germany’s Challenge

European neighbors are less well positioned. Germany, for example, logged 663,000 births in 2011, the lowest since official records began and less than half the 1.4 million peak of 1964. There are also fewer babies in Spain, Italy and France, perhaps as a response to the region’s financial crisis, which may also encourage people to seek work in other countries.

Knightley said that should Germany’s workforce shrink 1 percent a year, it’s going to need greater productivity to maintain its economy’s size, while the U.K. will enjoy a growing workforce.

Unless checked, the share of German government debt per capita could also rise to about 27,000 euros ($36,500) by 2020, worse than even Greece, ING said. Europe will be under pressure to react by raising retirement ages and following the U.K. in creating incentives for people to work longer.

The U.K.’s birth bonanza isn’t without cost. The growing population will support inflation by pushing up the cost of homes and commodities, according to Kit Juckes, global strategist at Societe Generale SA.

‘Blind Eye’

“When the economy is in recession or barely growing, the lack of wage pressure and the weakness of real incomes will encourage policy makers to turn a blind eye to the stubbornness of inflation,” he said. “But as the economy recovers, and particularly if inflation is picking up at the same time, they just won’t be able to.”

Resources will also need to be directed toward education and health care as well as building infrastructure such as housing, transportation networks and new energy capacity. Knightley said the need to find cash will pressure the defense budget and prompt the government to encourage private investors.

“The key question is how this will be paid for,” he said.

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