The power of elderly consumers – how demographic change affects the economy through private household demand in Germany

Demographic change challenges the economy in many ways. The impact on pension systems, health care, labour force etc. has already been widely analysed. An ageing population directly increases the number of retired persons, the need for nursing places and the contribution rates for social security systems for example. It also indirectly influences the production structure by shifts in the composition of final demand through changes in consumer behaviour. The objective of this paper is to quantify the impact of age specific consumer behaviour and demographic change on production, labour market and GDP components. Earlier research led to consumption functions for 13 different consumption purposes depending on the age structure of the German population (as presented at EcoMod 2012). These are implemented in the macro-econometric input-output model INFORGE (INterindustry FORecasting Germany) developed by GWS. The model has been used for economic forecasts and simulation or scenario analysis in many projects and studies. Amongst other features it is characterised by a high disaggregated sector information provided by National Accounts data and input-output tables. Demand and supply side are equally modelled taking the interacting relationship between production sectors and private household demand as well as price effects into account. Overall, the model structure gives the opportunity to trace impact and linkages of changes in the structure of private household demand on production and other parts of the economy. Two different scenarios are calculated and compared in order to quantify the impact of age induced changes in demand. In the first scenario it is assumed that the population composition does not change, i.e. the shares of the single age groups stay the same over the projection period. The results will be used as baseline. The second scenario includes the future population composition given by the population projection of the Federal Statistical Office. Due to demographic change shares of older age groups increase. Comparing both scenarios, consequences of an ageing population for production and service sectors, the labour market, GDP and its components can be identified. Demographic change induces changes in private household consumption expenditures via age specific consumer behaviour. This will affect the structure of final demand and hence the goods and services that have to be provided. Consequently the structure and amount of intermediate products alters as well. The lower demand for food and beverages by elderly as the share of elderly in the population rises for example will not only reduce the necessary output of the sector manufacture of food products and beverages but also the output of the agriculture and wholesale trade sectors that are main providers of intermediate products for manufacture of food products and beverages. As result it is expected that service sectors (especially household related health services) gain importance. Services are characterised by a comparably small amount of imported intermediate inputs, lower wages and salaries per employee and higher gross value added per sector. The amount of imported goods should decline: Industries are the main importing sectors and their output will reduce relative to services.