In the last issue, we discussed how the bankruptcy of Lehman Brothers in 2008 had changed the landscape of global financial conditions, as major central banks subsequently implemented ultra-loose monetary policies that expanded their balance sheets, which, in effect, pushed down government bond yields.
The global financial crisis, regarded as the worst in modern times, has had a long-lasting impact on economies around the world. The economic size of many countries, such as Spain and Greece, is much smaller compared to ten years ago. According to the International Monetary Fund, their output is still well below levels that would have prevailed if output had followed its pre-crisis trend.
In addition to the direct impact, the economic crisis of ten years ago has had indirect consequences. Unfortunately, these are affecting some economies over a much longer time horizon. Lower fertility rates, for instance, have been observed over the past decade in the societies that were battered by the global financial crisis, potentially dragging down long-term growth.
In this issue, we will discuss the trend of fertility rates in some major economies. We will also look at Hong Kong’s fertility rate, labour market, and the implications for our long-term economic prospects.
Figure 1 shows the fertility rate – the number of births per woman – from the turn of the century in the United States and Eurozone. Both these economies were at the centre of the financial crisis. Following the crisis, the upward trend came to a halt, and the rates posted a steep decline when the economic situation worsened.
One explanation is that economic uncertainties and job insecurities caused families to avoid or delay having babies, as they contemplated the cost of having children in such an environment. This has definitely become a drag on the growth of the labour force later on.
Figure 2 plots the relationship between the health of the labour market and fertility rate in Spain and Greece. The two economies were so badly hit that they continue to register higher unemployment rates than the other Eurozone member states. In Spain, the fertility rate fell from 1.45 in 2008 to a trough of 1.27 in 2013 before rebounding, while the unemployment rate more than doubled from 11.2% to over 26% during the same period.
Hong Kong was not at the heart of the financial crisis, and we have not seen the sharp decline in the fertility rates in the past decade that places like Spain have experienced. However, Hong Kong’s fertility rate has been traditionally very low, and remains among the lowest in the world.
In the meantime, our life expectancy has been increasing, and recently has become the highest in the world. People in Hong Kong are expected to live, on average, up to some 84 years (Figure 3). Meanwhile, there was a net outflow of 24,300 Hong Kong residents last year, compared to a net outflow of 6,100 in 2016. We should pay more attention to this migration trend, as these people, who tend to be more educated, could otherwise start families in Hong Kong.
All of the above represent a demographic challenge, raising questions about whether we will have sufficient labour supply in the future to allow Hong Kong to unlock its full economic potential.
It may be comforting to learn that the labour participation rates of both the elderly and women have been increasing (Figure 4). However, even taking this into account, the total labour force (excluding foreign domestic helpers) is expected to reach a plateau in 2019 to 2022 at 3.67 million to 3.68 million, before dropping to 3.13 million in 2066, according to a projection by the Census and Statistics Department.
In the past few decades, we have been fortunate to have the option of foreign domestic helpers to take care of household work, thereby unleashing a higher capacity of the local labour force. However, we should be cautious that the era of being able to access a large pool of low-salaried labour from our neighbours in the region might one day come to an end as the living standards in their home countries improves.
The demographic challenge in Hong Kong will add pressure to public health, elderly care services and retirement protection in the future. As our labour force starts to shrink, without a significant improvement in labour productivity or great leap forward in automation, or changes in immigration policies, it is hard to call our economy a sustainable one.
The challenge is worrisome because it threatens our economic growth in the longer run while we have already been suffering from acute labour shortage across a wide range of sectors for quite some years.
In the 2018 Policy Address, the Government has made a timely response in addressing the land bottleneck with its plan to reclaim land under the Lantau Tomorrow Vision, and to “develop land resources in a resolute and persistent manner.”
But no bold initiatives to relieve the demographic challenge and labour shortage issues have been introduced. The establishment of the Human Resources Planning Commission by the Government earlier this year could be a good first step. However, we cannot afford to stop there, as doing nothing entails costs too.
It is time now to relax our labour and immigration policies in order to remove the acute labour bottleneck, even though reaching a societal consensus on this issue will be a difficult one.