18.05.2020  Pablo Hernández de Cos Appearance before the Parliamentary Economic Affairs and Digital Transformation Committee Governor  Ladies and gentlemen, I appear before you today in particularly difficult circumstances. Our country, like many others, is experiencing an enormously complex situation. My initial words are for all Spanish citizens, whose behaviour is proving exemplary. And most particularly they are for all those professionals who, putting their own health at risk, are working so resolutely to preserve the health of others and keep essential services operating. Naturally, these initial words are also to convey condolences to all those who have lost loved ones in this pandemic. We are facing an unprecedented situation. From the standpoint of its economic impact, it has three characteristics I wish to highlight, given that they condition the optimal economic policy response. First, the scale of the shock is immense. Unfortunately, we have seen how, in just a few days, the pandemic stretched our health system to the limit, cutting short thousands of human lives and leaving a deep scar on their families and on Spanish society as a whole. The situation has led our authorities, like so many other governments worldwide, to adopt drastic social distancing measures that severely limit people’s movements and a practical complete shutdown of activity in some productive processes. The economic impact of these measures is most acute because of the reduction in the supply and demand of goods and services.
This would cause both an inward shift, and steepening of, the Phillips curve, raising the price level and increasing its responsiveness to upward demand pressures. The UK has been a particular beneficiary of demographic trends over recent years. The UK working age population has risen, on average, by over ½% per year over the past two decades. It has also experienced rising rates of labour market participation, in particular among older workers and women. The first, and possibly both, of those factors are now in reverse gear. The share of the total UK population of working age has been falling since 2008. Globally, dependency ratios – the fraction of the population not in the workforce – is forecast to start rising from around now for the first time since the 1970s (Chart 15). This rise in dependency ratios is fastest in high-income countries, such as the UK. Until recently, this effect had been more than offset by rises in the UK population. But that, too, is changing. Recent estimates suggest the UK population may have shrunk by as much as 1.3 million people over the past year.18 If these demographic trends continue – a smaller population fewer of whom are in work – this would turn the demographic tailwinds of the past decade into a headwind looking ahead, constraining supply and potentially amplifying inflationary forces. 16  Friedman (1961). Goodhart and Pradhan (2020). 18 See O’Connor and Portes (2021). The authors themselves describe this estimate as an upper bound.