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Getting Older is Cruelest Blow to Global Growth. Just Ask Canada

Older workforce means slower GDP growth and interest rates around the world

An older population is becoming the most powerful drag on Canada's job market and growth prospects. And it's also a reason why the global economy may get stuck in an era of low interest rates and weak demand.

Bank of Canada Governor Stephen Poloz gave a blunt speech last week, saying that five decades of expansion powered by the Baby Boom generation is ending, and Canada's potential economic growth has slowed to 1.5 percent. That pace is almost a full percentage point below the average gain in gross domestic product over the last 35 years. 

For Canada, at least, business leaders should now count themselves lucky to earn a "pretty good return'' of 4 percent like some companies in Asia, he said. Young people must think about working longer and saving more to fund the retirement their parents had, and governments must make tougher decisions on tax, trade and immigration policy in the hopes of salvaging marginal gains in future income growth, Poloz said.

``Those folks have been entering retirement for the past few years, and potential economic growth has been slowing as a direct result,'' Poloz said last week in Quebec City. ``We cannot just sit back and wait for these slow-moving forces to reverse.''

The biggest gain in the population over the past 12 months has been the 55 years and older set, which rose almost six times more than the so-called prime age population aged 25 to 54.

It's a trend mirrored in most industrialized nations such as Japan, where the central bank is struggling against deflation and anemic growth. Central banks around the world have set near-zero or negative interest rates aiming to regenerate inflation. Slow global growth hurts Canada's trade-dependent economy by curbing exports of crude oil, machinery and minerals.

The fading job market means the Bank of Canada's 0.5 percent policy interest rate won't need to rise as soon or as much in past economic recoveries to keep inflation in check. The so-called neutral rate that keeps the economy in balance could be as low as 0.75 percent now from as high as 5.5 percent before the global financial crisis, Poloz said.

``The most important force pushing the neutral rate down has been a steady decline in the potential growth rate of the economy,'' Poloz said. ``In turn, this decline is being driven primarily by the aging of our population, which is slowing the rate of growth of the labor force.''

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