Economists remain puzzled because the sluggish economy has not recovered more.
After all, governments have applied unprecedented stimulus, very low interest rates and poured in billions of dollars into the bond market to revive the economy, while bailing out the automobile and banking sectors.
What has happened is that there is a change in our population profile as we have gone from strong population expansion to a decline at least in the rate of population increases. Weak demand and excess savings were making it difficult to stimulate a major rise as in the 1930s or even worse.
We in North America have an aging population. The economy’s potential output depends on the number of workers and their productivity. We in Canada are slightly better off than the United States as our population, reinforced by mass immigration, still is surpassing the trend south of the border. A slowdown in population growth will entail an equivalent drop in expansion if everything else remains the same. However, the recession accelerated the processes as many retired, perhaps not voluntarily, so the workforce numbers fell even more. Participation in the labour force fell from approximately 68 per cent to the low 60s level.
Not only the size of the workforce but its age also affects the demand for “things”. Slower demands also means a slowdown in factory expansion plans. Too, it also suggests that there will be less innovation or technological advance to take advantage of it.
Moreover young adults typically borrow money as they have to pay for setting up their households and taking care of children. As they age, their spending usually tapers and higher savings rates ensue, changing their balance sheets. Interest rates fall along with weaker investment activity. It is no surprise that interest rates fall as borrowing and spending decline. Clearly, as more of population reaches retirement age. All these pressures are accentuated: slower growth and diminished expansion, reducing the size of the workforce. That part of the cycle stays around.
At some point the aging population uses up its savings and workers need to replenish goods, new automobiles, more modern appliances, and house renovation. In other words the wheel does turn eventually. Furthermore rising lifespans means that older workers once again will be in the market for goods.
Hence, for the time being, we must wait out this period of secular stagnation.