The Fertility Paradox; the Fed’s very political cut, BoE forced to pause & Munich Auto Show blues for some

Demography is destiny and the numbers are clear: Fertility rates are falling fast, even as governments spend more than ever to support families. But money alone isn’t moving the needle. This week, we unpack the fertility rate paradox and why education – both as a factor in declining birth rates and a tool to adapt to demographic change – may be the real game-changer. From pensions to productivity, the impact is far-reaching. We explore the rippling effects in this week’s deep dive.

In our What-to-Watch category, we look at the Fed as it gears up for a politically charged rate cut despite inflation risks. The Bank of England hits pause on rate cuts and slows quantitative tightening amid stubborn inflation and we complete our views with the Munich Auto Show highlighting European carmakers’ struggles amid falling sales and mounting pressure from Chinese competitors and trade tensions.

The Fertility Rate Paradox: Education is Key

The full analysis for you here.

• Money can’t buy more children. Among OECD countries, tax breaks, cash benefits and services granted for families and children corresponded to 1.8% of GDP. In the EU-27, the average share of government expenditures spend on family and children has increased from 1.6% in 2001 to 1.9% of GDP in 2023, ranging from 0.8% in Malta to 4.0% in Denmark. However, in many industrialized countries today family and children policy is not only considered an important element in preventing childhood poverty and smoothing consumption, but also as more or less subtle incentive to increase the fertility rate. The unprecedented decline in fertility rates in many countries calls the targets of today’s family policy into question, suggesting that just spending more money does not necessarily lead to higher fertility rates. This in turn raises the question of whether it would not be more important to focus family policies on guaranteeing that every child has the same chances irrespective of the parents’ income and to push ahead with the necessary measures to adapt labor markets and pension systems to the reality of aging societies. Even more so, if today’s critics of the UN population projections turn out to be right and the world population ages much stronger than expected in the long term.

• Fertility rates keep declining, and it is hard to tell why. The unprecedented decline in fertility rates is a global phenomenon. In Germany, for example it has fallen to an average 1.35 children per woman, in Japan it dropped to 1.15 children and the US reported a record low 1.6 children per woman in 2024. However, no one can pinpoint the one single reason, that could explain this development, since fertility behavior depends on a multitude of factors, including women’s education attainment levels, the availability and affordability of housing and childcare facilities, the labor market situation, work-life balance, and societal norms. In this context, efforts to rise the labor force participation rate of women to dampen the impact of demographic change on the labor market, the increasing cost of living, still-limited childcare facilities, and unaffordable housing, especially in big cities, and an increasing share of young people who intend to remain childless, are likely to keep global fertility rates low for the foreseeable future.

• Without a reversal of current fertility trends, the global population is set to peak earlier than expected and age much more than expected, which makes capital-funded pension provision all the more urgent. In the UN’s low-fertility scenario, the old-age dependency ratio in high-income countries would increase to almost 80% in the long run. This would mean a huge strain on tax- or pay-as-you-go financed pension systems, which will not be sustainable or provide an adequate standard of living in old age in the long run. Hence, pension systems will need to adapt to the needs of an aging population, and capital-funded pension provision will be critical.

• Labor markets and companies also need to be adapted to the needs of an aging workforce population. The decline of the population in working age could be cushioned by an increase of the labor force participation in higher ages. If EU-27 member countries succeeded in gradually increasing the labor force participation rates in higher ages to levels already seen in Japan today, the number of people available on the labor market would increase from 221.7mn today to 228.2mn in 2041 – even in the low fertility scenario – before declining to 192.1mn in 2060, with 43% of them being 50 and older by then. Therefore, labor markets and companies need to be adapted to the needs of an aging workforce population, not least in order to incentivize older workers to postpone retirement.

• Education is also key. While higher educational attainment does contribute to a lower fertility rate, it is also an important means to cushion the impact of demographic change on labor markets and economic growth, since the educational attainment level of the workforce population is positively correlated with productivity. Therefore, the decline in the number of children in the future should not trigger a cut in public spending on education. Instead, it should be at least kept stable in order to increase per capita investments in human capital.

The full analysis for you here.

What to Watch this week: The Fed’s very political cut, BoE forced to pause and Munich Auto Show blues for European car makers

The complete set of stories for you here.

Fed: A very political cut. As the Fed shifts focus to the labor market and faces increasing pressure to lower rates, we now expect frontloaded back-to-back 25bps rate cuts at its next two meetings (16-17 September and 28-29 October), followed by two others in H1 2026 (taking the Fed Funds Rate to 3.5%, in line with our previous scenario). But while job creation has weakened, tighter immigration has also drastically reduced labor supply, keeping the labor market relatively balanced. We expect unemployment to peak at 4.9% by Q1 2026, slightly above the equilibrium rate. Moreover, combined with monetary easing, the Big Beautiful Bill should also support GDP growth by +0.5pp next year (to +1.6%). And above all, inflation will remain above target (at 2.9% in 2026) as around three-fourths of the costs of tariffs are likely to be passed on to consumers by end-2026. In addition, medium-term household inflation expectations remain high, feeding further into inflation risks, which could even force the Fed to re-hike interest rates. In this context, market expectations of a terminal rate at 3% by July 2026 look too ambitious. 

Bank of England: Forced to pause and slow its quantitative tightening program. As inflation remains stubbornly high, the BoE’s strategy of one rate cut per quarter is looking increasingly untenable, with the policy rate currently 70-90bps lower than it should be considering inflation and economic slack. To restore its inflation-fighting credentials, we expect the BoE to enter a prolonged pause at its next meeting on 18 September, lasting until Spring 2026, with inflation not likely to fall convincingly below 3% before then. But to prevent long-term yields from rising further, the BoE will slow down its quantitative tightening (QT) from GBP100bn to GBP60-70bn annually. Nevertheless, we see limited scope for the 10-year Gilt yields to go below 4.5% as the fiscal deficit will remain close to -5% of GDP in 2026 (from -5.7% in 2025) and public debt will rise further to 105% of GDP. In this context, markets will be paying close attention to fiscal discipline in the Autumn Budget, in which we expect the government to announce at least GBP20bn of fiscal consolidation measures.

Munich Auto Show blues for European car makers. As the biennial auto fair kicks off, the European car sector is facing growing pressure on its domestic and export sales. European new car registrations are down -0.7% year-to-date and Germany, France and Italy are shrinking by -2%, -8% and -4% respectively. Overall, domestic sales remain roughly -25% below their 2019 level and the upside risks from electric‑vehicle adoption remain limited: in nearly 60 % of EU countries, EV penetration is under 15%. Price gaps, high electricity costs and patchy charging infrastructure continue to favor hybrids, where Chinese competition is getting stronger. They have doubled their European market share to about 6% and undercutting incumbents with models priced below EUR30,000 could push this to 10–11 % of Europe’s hybrid/EV segments by year‑end. The shift of powertrain priority is biting margins, contributing to the over 200bps squeeze reported by European automakers in H1 2025. Meanwhile, Chinese competitors are now also dominating their home market (70% market share) and regaining market shares from European brands. This is expected to result in at least EUR4bn in potential revenue losses for the sector this year. To add to this, trade tensions with the US threaten up to EUR5bn in revenues for the European auto sector. With operating margins already down to a medium-low single digit, manufacturers must balance cost‑cutting with urgent investment in batteries, software, and autonomous technology.

The complete set of stories for you here.