Italian ageing and declining population will affect consumption
Analyst Insight by Media Eghbal.
Italy will experience a reduction in its population owing to falling birth rates and rising death rates given the size of the population over 65 years. This coupled with an ageing populace is likely to change consumption patterns considerably. Further relaxation of immigration laws could be one way to combat this problem.
Italy's population growth has been stagnating. In 2006, the population numbered 58.8 million, which has only grown by 3.9% since 1986. This compares with growth of 12.4% for Western Europe. Italy's ageing population is due to longer life expectancy and low birth rates, which will be magnified by the increased rate of deaths going forward, given the ageing population:
- Concurrent with the expected reduction in population, those aged over 65 are growing in numbers. They numbered 11.6 million in 2006 compared to 8.2 million of those aged 0-14 years. The former age group has grown by 10.4% between 2001 and 2006 whilst the latter group has grown by 1.9%;
- There are 12.7 million pensioners in Italy, accounting for 21.6% of the population in 2006 compared with 18.0% for the Western European average.
Consumer demands change as a population becomes older; therefore, the demographic profile of the population can dramatically influence consumption patterns.
The demographic make up of the population is of significant importance to the future health of the Italian economy and consumption patterns:
- Generally, fast moving consumer goods are bought by a younger demographic. In the current era of quick turnaround in cheap fashion, a younger urban population is key to the success of cheaper retail brands;
- The latest available data from national statistics for 2005 showed that households comprising of a single person under the age of 35 had an average monthly expenditure of €1,895. This compared with €1,296 for a single person aged 65 and over. The data also demonstrated the spending power of the two households with the young single household spending 6.6% of the expenditure on clothing whilst the old single household spent 3.4%. On leisure activities, the younger household spent 6.5% of expenditure whilst the older household spent 3.5%;
- Although private consumption has been recovering, growth in 2006 was an anaemic 1.5% in real terms, according to the OECD. House prices have not risen as much in Italy as in some European countries, so the wealth effect on households has been muted;
- Furthermore, annual disposable income per capita equated to €16,716 in 2006 compared to a UK figure of €20,088;
- A pensions crisis could arise particularly given that the dependency ratio, i.e. the ratio of non-working age population (aged 0-14 and 65+) to working age population (aged 15-64) per 100, is rising steadily and stood at 51.1 in 2006 compared with 45.8 in 1991. The fertility rate in Italy was 1.3 in 2006, well below the 2.1 replacement rate needed for a developed economy to replace itself naturally.
The flip side of an ageing population is that the quality of the consumer expenditure could improve but volumes would decrease. Older people generally spend more but on less items.
The decrease in Italy's population, coupled with an ageing demographic, will shape the future consumer profile considerably:
- A smaller population will have a detrimental effect on the volumes sold of fast moving consumer goods as will an ageing population. Older people tend to spend less on leisure and clothing;
- An ageing population will also have a detrimental effect on the labour force, which could lead to a lack of skilled workers. This may force the Italian government to relax its immigration policies further to attract labour;
- Italy's unemployment rate has been falling down to 7.6% in 2006 versus 9.5% in 2001 due to employment creation. The situation could be helped further through the reduction of employment protection laws which would give the labour market more flexibility. A bi-product of this would be increased consumption as employment participation is elevated;
- There would be positive implications for the pharmaceutical sector with an ageing population. In order for people to live longer, they will be consuming more drugs to control the conditions that old age brings with it. This could also put undue pressure on the health service resulting in higher government expenditure on health.
Italy is expected to experience a substantial decline in its population by 2050:
Real GDP will grow by 1.8% in 2007 and 1.7% in 2008, which is relatively muted and has been dampened by a lack of competitiveness, rising interest rates in the eurozone and productivity issues. Recession could loom if a global shock such as the recent credit crunch in the financial markets, caused by the subprime defaults in the US mortgage market, creates contagion in Europe.
According to the OECD, private consumption growth will plateau in 2007 staying at a rate of 1.5% in real terms and growing by 1.8% in 2008. A declining and ageing population will further exacerbate consumer expenditure growth in the future. Consumption is an important driver of economic growth, given that it accounted for 60% of GDP in 2006.
In 2006, the Italian government considered giving amnesty to around 350,000 illegal immigrants but the move was challenged by the European Commission with a warning that all applications would have to be scrutinised for authenticity, otherwise Italy would face EU sanctions.
However, the government has passed a number of pension related reforms, aimed at extending the life of its labour force and reducing benefits expenditure. It will raise the pension eligibility age for men from 57 to 60 in 2008 and 62 in 2014. Additionally, reforms encourage the establishment of private sector pension schemes.
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