Macroeconomic Impacts of Global Demographic Change: The Case of Australia

Abstract

The world will experience dramatic demographic change over this century. This paper examines the impacts of the global demographic change on the Australian economy at both aggregate and sectoral levels in a global multi-region and multi-sector general equilibrium model. Using a detailed structural model, we simulate demographic shocks of six regions in the world economy as well as Australia’s own demographic shock to investigate their impacts on Australian macroeconomic conditions, economic structure, and trade patterns. The results suggest that demographic change in different regions of the world economy will have different impacts on sectors in Australia depending on trade patterns between Australia and other regions. The energy, mining, and durable manufacturing sectors in Australia are the most affected. Demographic change in China, Japan, and Korea has significant negative impacts on Australia, but partly offsetting these shocks are positive demographic shocks from emerging Asia. The overall impact of the rest of the world on Australian GDP is quantitatively negligible, but the impacts on the real interest rate and trade balances are significant. Global demographic change increases Australian real interest rates in the next two decades on the assumption that emerging countries can access global capital markets and take advantage of their demographic dividends.