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Deutsche Bank Markets Research

Global Economics Date 9 September 2013

Sanjeev Sanyal

The Wide Angle

Predictions of a Rogue Demographer
Summary The world is approaching a major turning point in its demographic trajectory and we think that the shift is likely to be sooner and sharper than mainstream projections suggest. In our view, global fertility will fall to the replacement rate in less than fifteen years. Population may keep growing for a few more decades from rising longevity but, reproductively speaking, our species will no longer be expanding. We forecast that world population will peak at around 8.7bn in 2055 and will then decline to 8bn by 2100. Thus, world population could peak half a century sooner and, by 2100, stand 2.8bn below what the UN currently predicts. Developed countries have long had low birth rates but the largest declines in fertility are in developing countries with the Chinese, Russians, Koreans and Brazilians no longer replacing themselves. A large decline in the Chinese workforce is now unavoidable irrespective of the removal of the one-child policy. Due to a skewed gender ratio, we found that China no longer has enough child-bearing age women to stabilize its population. Aging societies will respond by extending working lives. In our view, most readers of this report will be both working and healthy into their seventies. This will impact everything from consumer patterns to university systems but we are confident that aging societies are not about retirement homes. Chinas transformation from being the factory to the world to being investor to the world will create opportunities for younger countries like Indonesia, Philippines and, most importantly, India. Interestingly, United States is likely to enjoy a growing workforce into the 2050s (i.e. longer than most emerging markets) although falling birth-rates among immigrants will dampen the trajectory. We also think that Germany will prove surprisingly good at absorbing immigrants and will do much better than the UNs dire demographic projections.

Global Strategist (+65) 6423 5969

________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

9 September 2013 The Wide Angle: Predictions of a Rogue Demographer

We live in a world that is experiencing unprecedented demographic change. Economists, policy-makers, corporates and investors are increasingly worrying about population growth dynamics, rapid aging, falling fertility, urbanization and the size of working age population. Corporate presentations and policy papers these days seem to be incomplete without some reference to demographic factors. However, the forecasts used in all such papers/discussions come almost exclusively from one source the United Nations Population Division. Given the embedded importance of these forecasts, we think it is worthwhile looking into the robustness of the forecasts. In a report written more than two years ago, we had concluded that the UN forecasts may be significantly overstating the trajectory of population growth (see The End of Population Growth, The Wide Angle series, 13th May 2011). Two months ago, the United Nations Population Division published its revised numbers1. This report is an evaluation of the new forecasts. The UNs latest numbers suggest that world population, currently at around 7.2bn, will rise to 9.6bn by 2050 and then further to 10.9bn by 2100 (see Table1). Our projections, however, found that these are very unlikely outcomes. When we investigated individual country data, we found that the UNs forecasts are even less believable. For instance, Nigeria had a population of 159.7mn in 2010 but the UN expects the countrys population to jump to 913mn by 2100. The country admittedly has high fertility rates today but it would be very odd if birth rates did not fall sharply as Nigerians begin to notice how crowded it was getting. Indeed, the fertility rate for Nigeria is no higher than those we would have seen in other emerging countries till just a few decades ago. As shown in Table 2, emerging countries including Iran and Bangladesh - have seen very large declines in recent decades. There is every reason to expect such declines in countries like Nigeria (in fact, the fertility rate has already started to fall). Table 1: United Nations Population Forecasts
In millions 1. Bangladesh 2. Brazil 3. China 4. France 5. Germany 6. India 7. Indonesia 8. Iran 9. Japan 10. Mexico 11. Nigeria 12. Republic of Korea 13. Russian Federation 14. South Africa 15. Turkey 16. United Kingdom 17. United States of America 18. World 2010 151.1 195.2 1,359.8 63.2 83.0 1,205.6 240.7 74.5 127.4 117.9 159.7 48.5 143.6 51.5 72.1 62.1 312.2 6,916.2 2020 169.6 211.1 1,432.9 66.6 81.9 1,353.3 269.4 84.1 125.4 132.0 210.2 50.8 140.0 55.1 80.3 65.6 338.0 7,716.7 2030 185.1 222.7 1,453.3 69.3 79.6 1,476.4 293.5 91.3 120.6 143.7 273.1 52.2 133.6 58.1 86.8 68.6 362.6 8,424.9 2040 195.9 229.4 1,435.5 71.5 76.4 1,565.5 311.3 96.8 114.5 151.8 350.7 52.3 127.0 60.9 91.8 71.0 383.2 9,038.7 2050 201.9 231.1 1,385.0 73.2 72.6 1,620.1 321.4 100.6 108.3 156.1 440.4 51.0 120.9 63.4 94.6 73.1 400.9 9,550.9 2100 182.2 194.5 1,085.6 79.1 56.9 1,546.8 315.3 94.3 84.5 139.8 913.8 40.5 101.9 64.1 86.5 77.2 462.1 10,853.8

Source: United Nations Population Prospects, 2012 Revision

World Population Prospects: The 2012 Revision, UN Population Division, June 2013.

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Even in the case of developed countries, we found that the UNs forecasts are untenable. The US for instance, is projected to witness a rise from 312mn in 2010 to 462mn in 2100. This is a truly remarkable for a country with a fertility rate that is already below replacement rate. Of course, the US can be expected to add population through immigration but the implied pace of intake would have to be very high since fertility rates of immigrants too are falling fast. A recent study by Pew Research found that the birth rate for the US fell to a record low in 2011 with immigrant women experiencing the sharpest declines2. This should not be surprising since the source countries too have low birth rates now. Moreover, even if the US does hit a population of 462mn by 2100 through immigration, we do not think that this is reflected in the UNs projections of outflows registered by the countries of origin. The UNs forecasts are particularly odd given that it also expects the proportion of the worlds urbanized population to rise from todays 52% to over 67% by 20503. We think this is a reasonable expectation but would also like to note that urbanization is the strongest contraceptive known to man. Every known society has witnessed large declines in birth rates as it has urbanized, irrespective of cultural background. With two-thirds of the worlds population living in urban areas by 2050, and presumably even more by 2100, we should expect a big decline in the worlds birth rates (a similar argument can also be made about the impact of rising per capita incomes and female literacy in emerging markets). Figure 1: The Decline in Fertility since 1950

Source: United Nations Population Prospects, 2012 Revision

The End of Population Growth

A useful way to think about trends in birth rates is to look at the Total Fertility Rate (TFR). This is the average number of live births per woman over her lifetime. In the long run, a population would be stable if TFR is at the replacement rate. This is often said to be 2.1 births per woman but in reality only the most developed countries can maintain their population with this level. For developing countries, the replacement rate is much higher due to factors such as higher infant mortality. Thus, the replacement level of TFR is around 2.3 for the world as a whole.

2 US Birth Rate Falls to Record Low; Decline is Greatest Among Immigrants, Gretchen Livingston & DVera Cohn, Pew Research, Nov 2012. 3

World Urbanization Prospects, 2011 Revision.

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As can be seen from Table 2, fertility rates have declined very sharply since 1950 and TFR is now well below replacement rates for most developed countries. Countries like German and Japan currently have TFRs of around 1.4 and this foretells a large decline in their populations in the future. Nonetheless, the largest declines in fertility have occurred in emerging markets. South Korea, for instance, has a TFR of barely 1.3, down from over 5 in the 1950s. We have also similarly witnessed very large declines in Latin America with Brazil witnessing a fall in TFR from 6.2 in early 1950s to the current level 1.8 which is below replacement. Yet again, contrary to the popular image, many Latin American countries now have low birth rates. This is also true of Eastern Europe. Russia, for instance, has a TFR of 1.53 also well below replacement. Table 2: Total Fertility Rates
In number of children 1. Bangladesh 2. Brazil 3. China 4. France 5. Germany 6. India 7. Indonesia 8. Iran 9. Japan 10. Mexico 11. Nigeria 12. Republic of Korea 13. Russian Federation 14. South Africa 15. Turkey 16. United Kingdom 17. United States of America
Source: United Nations Population Prospects, 2012 Revision

1950-1955 6.36 6.15 6.11 2.75 2.13 5.90 5.49 6.91 3.00 6.70 6.35 5.05 2.85 6.30 6.62 2.18 3.33

1980-1985 5.98 3.80 2.69 1.87 1.46 4.47 4.11 6.53 1.75 4.25 6.76 2.23 2.04 4.56 4.07 1.78 1.80

2010-2015 2.20 1.82 1.66 1.98 1.42 2.50 2.35 1.93 1.41 2.20 6.01 1.32 1.53 2.40 2.05 1.89 1.97

China and India are the worlds most populous countries and their fertility trends have a disproportionate impact on the worlds demographic evolution. Chinas TFR declined from 6.11 in the early 1950s to 2.69 in 1980-85. As one can see, birth rates were already declining before the one child policy was introduced. The ratio is now at 1.66 but, given the evidence of Chinas East Asian neighbors, it would probably have been below replacement rate even without the one-child policy. However, the headline TFR overstates Chinas reproductive capacity because it has a very skewed gender ratio. Over the last decade, China has had 117 boys being born for every 100 girls (the natural ratio is about 105). Since reproductive capacity is driven by women of childbearing age, Chinas Effective Fertility Rate is even lower at around 1.5 which is far below the replacement rate. India too has witnessed a steady decline in TFR from 5.9 in 1950-55 to an estimated 2.5 in 2010-15. This is not far from the replacement level and TFR for urban areas is likely to be already below the replacement level. Given the expectation of rapid urbanization over the next three decades, it is reasonable to expect the overall TFR to fall further. Moreover, note that India too has a skewed gender ratio at birth (111 boys for every 100 girls). In other words, Indias effective birth rate will probably fall to replacement level by 2025. Given the above trends, we feel that the worlds overall fertility rate will fall to replacement rate by 2025. In other words, reproductively speaking, our species will no longer be expanding a major turning point in history. Of course,
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overall world population will still expand for a couple more decades due to momentum in the age structure and rising longevity (see Figure 2), but this lagged effect will ultimately ease off unless we discover the elixir of immortality. Thus, we forecast that world population will peak around 2055 at 8.7bn and will then decline to 8.0bn by 2100. In other words, our forecasts suggest that world population will peak at least half a century sooner than the UN expects and that by 2100, and that level will be 2.8bn below the UNs prediction. This is obviously a radically different view of the world. Figure 2: Rise in Life Expectancy Since 1950

Source: United Nations Population Prospects, 2012 Revision

As shown in Table 3, our forecasts for several countries are significantly below conventional projections (compare with Table 1). The US and Nigeria still show large increases in population but the trajectory is much lower. India replaces China as the worlds most populous country around 2030 but peaks in 2055 at 1.52bn and then declines to 1.45bn by 2100. Contrast this with the UNs expectation that Indias population will peak at 1.64bn in 2065. Our forecasts for China are closer to the UNs numbers but are still 60mn below the UNs forecast by 2100. Note that Germany is one of the few countries where our forecast is higher than the UNs projections. We too expect the German population to shrink significantly but feel that the country will succeed in attracting and absorbing more immigrants than the UN anticipates. We expect Germanys population to fall from todays 83mn to 77mn by 2050 and further to 66mn by 2100 but these are much higher than the UNs projection of 72.6mn and 56.9mn respectively. If anything, our forecast may prove to be conservative. Many of the new immigrants will come from the rest of Europe but skilled nonEuropeans also will be absorbed. Earlier this year, Germany removed a third of its immigration rules and lowered barriers for mid-skill workers. For the highlyDeutsche Bank AG/Hong Kong Page 5

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skilled, Germany already had rules that are among the most liberal in the OECD.4 Table 3: Deutsche Banks Population Forecasts
In millions 1. Bangladesh 2. Brazil 3. China 4. France 5. Germany 6. India 7. Indonesia 8. Iran 9. Japan 10. Mexico 11. Nigeria 12. Republic of Korea 13. Russian Federation 14. South Africa 15. Turkey 16. United Kingdom 17. United States of America 18. World
Source: Deutsche Bank

2010 151.1 195.2 1,359.8 63.2 83.0 1,205.6 240.7 74.5 127.4 117.9 159.7 48.5 143.6 51.5 72.1 62.1 312.2 6,916.2

2020 169.3 210.4 1,431.4 66.0 81.9 1,347.5 269.4 84.1 125.5 131.7 210.0 50.8 141.0 55.1 80.3 65.2 337.6 7,630.1

2030 185.0 221.0 1,451.7 68.7 80.1 1,444.1 293.5 91.3 121.4 142.9 272.7 52.2 137.4 58.1 86.5 67.4 359.9 8,173.9

2040 197.1 226.1 1,432.7 70.4 78.6 1,497.5 311.3 96.8 115.7 151.4 348.4 52.3 132.2 60.9 90.5 68.9 378.4 8,553.0

2050 203.6 225.4 1,380.6 71.1 77.0 1,517.7 321.4 100.6 109.4 155.8 431.2 51.0 126.2 63.4 91.9 69.9 391.8 8,713.4

2100 190.0 189.0 1,025.6 70.3 66.1 1,448.1 315.3 94.3 85.4 138.8 521.4 40.5 107.0 64.1 82.2 71.3 402.2 8,026.1

Overall, our forecasts lead us to fundamentally different expectations of how demographics will impact the 21st century. Readers are warned, nonetheless, that such long term forecasting suffers from the tyranny of small numbers a small change in our model can give very different results when extended over such long periods. Rather than focus on the exact numbers generated by our model, we want merely want to alert readers to the strong likelihood that the future trajectory of world population could be an order of magnitude below what conventional projections suggest.

Projecting the Worlds Workforce

Our projection of a sharper-than-expected decline in fertility and population has important implication for the worlds available workforce. It not news that the population of working age (defined here as 20-59 years) will decline very sharply in many countries. It is now generally accepted that this shift will occur in developed countries like Germany and Japan, but we think that this will happen sooner than expected and that more developing countries face this than generally recognized. Russia already has a falling workforce problem with the population of working age (defined as 20-59 years) expected to collapse from 87.6mn in 2010 to 77.5mn in 2020, and further to 61.5 by 2050 if the same trajectory is maintained. South Korea will see its workforce peak at 30.3mn from 2015 but followed by a sharp decline. From the perspective of the world economy, the turn in the dynamics of the Chinese workforce, still the worlds largest, will be the most important shift. Our projections suggest that the Chinese working age workforce (defined as 20-59 years) will decline modestly from 853.7mn in 2015 to 848.9mn by 2020, but then will then drop sharply to 781.8mn by 2030 and further to 743mn by

The Changing Mood on Immigration, Peter Sutherland, Project Syndicate, 3rd September 2013.

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2040 and 650.9mn in 2050. Indeed, unless the trajectory of fertility changes, our model projects the working age cohort to shrink to 446.5mn by the end of the century. Note that the UNs forecasts are only modestly above ours. This is a very large contraction in what is still the worlds largest pool of workers. In turn, it implies both a very big change in Chinas economic model which, till now, has relied heavily on the bulk deployment of labour and capital into infrastructure building and export-oriented manufacturing. Some economists argue that China can keep going for years because it is only 53% urban and can keep deploying millions of workers through continued urbanization. While it is true that urbanization will provide some cushion, we feel that the amount of excess rural labour may be overestimated. Rising wages in rural areas suggest that labour markets are already tight in the countryside. Moreover, we found that a large part of the younger workers had already migrated to urban areas and that the village population is increasingly made up of the old and of children left behind by migrants. A field survey of five major provinces showed that by the age of 25 years, only about a quarter of the rural population lives permanently in their home villages5. The left-athome children, of course, are likely to migrate when they grow up but they cannot be counted as incremental additions to the workforce since they will just be replacing their parents. In other words, urbanization is likely to disappoint as a net source of workers from here. Table 4: Deutsche Banks Working Population Forecasts (20 to 59 years)
In millions 1. Bangladesh 2. Brazil 3. China 4. France 5. Germany 6. India 7. Indonesia 8. Iran 9. Japan 10. Mexico 11. Nigeria 12. Republic of Korea 13. Russian Federation 14. South Africa 15. Turkey 16. United Kingdom 17. United States of America
Source: Deutsche Bank

2010 96.3 109.1 835.8 33.2 45.9 631.7 129.9 44.2 65.3 60.9 65.8 29.6 87.6 27.0 39.3 33.2 170.4

2020 115.2 119.9 848.9 32.4 43.0 735.1 148.0 49.7 60.6 71.4 86.0 29.8 77.5 29.0 44.7 33.8 176.8

2030 127.3 124.1 781.8 30.8 37.7 819.0 163.0 51.9 55.3 78.5 116.4 26.5 71.8 31.6 48.0 32.7 184.7

2040 132.6 121.3 743.1 30.3 36.5 866.5 167.9 53.7 48.2 80.2 155.7 23.7 68.2 33.7 48.6 32.8 196.4

2050 131.8 113.3 650.9 31.2 34.3 855.4 170.4 48.2 44.6 79.6 204.0 21.7 61.5 34.3 47.1 32.1 200.8

2100 103.2 74.6 446.5 33.1 28.8 700.2 146.9 41.0 33.8 58.3 324.9 16.1 50.2 31.5 33.1 32.5 167.5

Of course, there are a number of countries like Indonesia and Philippines that will be entering their demographic peak over the next decade. The biggest shift will occur in India as its working age cohort jumps from 631.7mn in 2010 to 735mn in 2020 and then to peak at 867.6mn in mid-2040s. Along the way, it will bypass China as the worlds largest pool of workers in the late 2020s. Whether or not India is able to create a policy-environment that can take advantage of this opportunity is beyond the scope of this report.

5 Demographic Transition in Rural China, Funing Zhong & Jing Xiang, Chapter 11 in Rebalancing and Sustaining Growth in China, edited by Huw McKay & Ligang Song, ANU e-Press, 2012

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Table 5: Primary School Students

In thousands 1. Brazil 2. China 3. France 4. Germany 5. India 6. Indonesia 7. Japan 8. Mexico 9. Nigeria 10. Republic of Korea 11. Russian Federation 12. South Africa 13. Turkey 14. United Kingdom 15. United States of America
Source: World Consumer Lifestyles Databook 2012 Euromonitor NOTE: # For Russia and Germany, the figure corresponds to 1995, not 1990

1990 12,944 122,414 4,127 # 3,727 96,265 29,713 9,607 14,379 12,933 4,894 # 7,849 6,952 6,978 4,500 22,174

2011 16,542 100,376 4,136 2,974 152,886 30,270 7,120 14,942 21,288 3,269 5,276 7,003 6,292 4,472 24,988

Change 27.8% -18.0% 0.2% -20.2% 58.8% 1.9% -25.9% 3.9% 64.6% -33.2% -32.8% 0.7% -9.8% -0.6% 12.7%

The impact of the above demographic changes is already visible in the pipeline of children making their way up the education system. Since 1990, the number of children in the primary school system of Russia and South Korea has dropped 33% according estimates published by Euromonitor. In China, the number has declined by 18%. In contrast, the number has gone up by 59% in India (note that this partly reflects improved enrollment). Interestingly, the pipeline of children in the US primary school system is still expanding. In other words, we need to get away from the narrative of aging developed countries and young developing countries.

Will Ending the One-Child Policy help China?

In Jan 2013, Chinas National Bureau of Statistics announced that the working age population (the statement defined it as 15-59 years) had declined by 3.5mn in 2012. An absolute decline in Chinas working age population was expected around the middle of this decade but appears to have been reached a few years earlier than anticipated. The contraction discussed in the previous section implies a very big change in Chinas economic model which till now has relied heavily on the bulk deployment of labour and capital into infrastructure building and export-oriented manufacturing. Given the important role Chinese labour has played in reshaping the world economy over the last two decades, this turning point is very important for the rest of the world as well. It is reasonable to expect Chinas economy will adapt to these demographic changes by changing its economic model in the long run. However, the speed of the change is so quick that there is danger that its existing industries could be severely squeezed by shortages of workers. China has seen sharp increases in wages in the last few years but the demographic projections would imply even greater wage pressure. The obvious solution is an abolition of the onechild policy and there are growing murmurs that a change may soon be announced. Unfortunately, we do not think this would add to the effective workforce in any meaningful time frame because of a number of factors: First, the countrys birth rate was falling sharply even before the one-child policy was instituted in 1980. Chinas TFR fell from 6.1 in the early 1950s to 2.7 in the early 1980s just as the One-Child Policy was being imposed. Thus, rapid
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urbanization and changing social mores were likely to have reduced birthrates significantly even without the one-child policy as witnessed in Korea, Japan, and Taiwan. Thus, the One-Child Policy probably accelerated what was happening anyway and, consequently, it is very unlikely that the fertility rate will jump back over replacement rate even after the removal of restrictions. Singapores repeatedly failed efforts to pump up birth rates show that TFR can be very difficult to revive once the social context has changed. Second, the countrys skewed gender ratio has fundamentally impaired the future reproductive capacity of the country by reducing the pipeline of childbearing age women. Over the last decade, China has had 117 boys being born for every 100 girls (the natural ratio is about 105). Thus, the number of women of child-bearing age is slated to drop from 378mn in 2010 to 340mn in 2020, then to 317mn in 2030 and further to 276mn in 2040. Given that most of these women have already been born, this trajectory is now largely hardwired. Basically, China simply does not have enough young women to stabilize its population even if it wanted to. Third, even if the birth rate did jump up, it would take a minimum of 20 years for any of the gains to show up in the workforce. Meanwhile, China would have to withdraw most of its female workers from an already shrinking workforce in order to give birth and tend to children. More school teachers and doctors would also be needed to service the new cohort of babies, thereby diverting even more workers from infrastructure building and export-oriented manufacturing. In short, the abolition of the one-child policy is unlikely to have much of a positive impact on Chinas labour force in any investable time horizon. Nevertheless, we feel that the authorities should still go ahead and make the change in order to reduce the now unnecessary human cost it imposes on common citizens. Removal of the policy may also smoothen the demographic trajectory in the very long run.

Implications of Rapid Demographic Change

As one can see from the above discussion, the world is approaching a major turning point in its demographic trajectory and the shift is likely to be sooner and sharper than conventional forecasts suggest. In turn, this is likely to affect everything from lifestyles to global supply-chains and geo-politics. Here are some of the areas where population dynamics is likely to have a major impact: First, aging societies will have to adjust soon to the fact that it is not possible for economies to sustain a retirement age in the early sixties. With people routinely living well into their eighties, it will soon be common for people to extend their working life into their mid-seventies. This is not an unreasonable expectation since todays old people remain remarkably fit compared to half an century ago (as this report was being written, 64-year old Diana Nyad successfully swam from Cuba to Key West, Florida). Societies that cannot make the socio-political adjustment to this new reality will struggle in the 21st century and will unduly burden the shrinking base of young people entering the workforce. Second, a corollary of the previous point is that aging does not imply a boom in retirement homes and an ever expanding medical sector. Yes, there will be more people in their sixties and seventies, but they will largely be fit and working. While there will be some increase in the medical support needed to keep this cohort going, it should not be blindly extrapolated from the past. Meanwhile, as anyone with children will know, falling birth rates will reduce demand for medical care from a high maintenance segment of the population.
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This implies a change in the mix of medical care rather than a spiraling increase in per capita medical support6. Thus, the main impact of aging will be the extension of active, working adulthood rather than a situation where large portions of the population are living is a prolonged geriatric twilight. In turn, this will impact consumption patterns, urban real estate and even the education system. For instance, university systems will have to be reoriented to deal with middle-aged workers who need to update their skills over a 50year career or perhaps want to completely change their profession. In contrast, the intake of younger cohorts will ease off due to the shrinking pipeline coming out of secondary schools. This implies a big change in the way education systems are set up. Third, the global demographic shift is not a developed country issue since the shift has been faster for many emerging markets. Russia already has a shrinking workforce and many Latin American countries, contrary to popular belief, have TFRs that are at or below the replacement rate. Note that the older cohorts in emerging markets tend to be low-skill manual workers and this will make it more difficult for them prolong their work-life compared to better educated older workers in developed markets. The rapid shrinking of Chinas workforce from 2020, which is now unavoidable, will have a major impact on the dynamics of the world economy (even allowing for some older workers working longer). As argued in an earlier report in this series, China will transform itself from being the factory to the world to becoming the investor to the world (see Global Imbalances in the Post-Crisis World, The Wide Angle series, 30th November 2012). This will create opportunities for younger emerging markets like Indonesia, Philippines and, most importantly, India to enter market segments being vacated by China. In turn, they will be followed by even younger countries like Nigeria. Nonetheless, it should be emphasized that demographics alone is not sufficient to generate growth and cannot substitute for sensible policy leadership. Fourth, some developed countries may do surprisingly well. The one developed country that stands out in our model is the United States. Even though our population growth projections are more moderate than those of the UN, the US can be expected to continue to enjoy an expanding working-age population till the 2050s (i.e. longer than many emerging economies). Germanys low birth rate implies a declining population but we feel that it will be much more successful in absorbing immigrants than anticipated by the UN. Thus, its demographic trajectory may not be quite as dire as generally believed.

The author of this report wishes to acknowledge the contribution made by Sayandeb Banerjee of Infosys Ltd, a third-party provider to Deutsche Bank of offshore research support services.

6 There will be, of course, a small minority of old people with medical conditions that need continuous support but this should not be taken to mean that the average seventy year old will be living, and working, in this way.

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The Wide Angle Series

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The Wide Angle Series continued

Random Walk Series

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Appendix 1
Important Disclosures Additional information available upon request
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Sanjeev Sanyal

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Regulatory Disclosures 1. Important Additional Conflict Disclosures

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2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at

3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless "Japan" or "Nippon" is specifically designated in the name of the entity. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

Risks to Fixed Income Positions

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates - these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

Deutsche Bank AG/Hong Kong

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David Folkerts-Landau
Global Head of Research Marcel Cassard Global Head CB&S Research Asia-Pacific Fergus Lynch Regional Head Ralf Hoffmann & Bernhard Speyer Co-Heads DB Research Germany Andreas Neubauer Regional Head Guy Ashton Chief Operating Officer Research Richard Smith Associate Director Equity Research North America Steve Pollard Regional Head

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