> It also means less people doing innovation

Not necessarily. Only a small proportion of the general population "does innovation". In fact, automation and boosting productivity may mean (even should mean) more people doing high-value, innovative work.

> and markets that start getting smaller

It does not matter if a market gets smaller by number of consumers if total population also reduces and individuals are better off.

For instance, smaller population means smaller construction industry but also likely fewer builders. Does that imply that a builder will be individually worse off than now? No. They could even be better off if productivity increases drastically.

In the 19th century the USA had plenty of innovation and a widespread growth mindset even though the population was much smaller and less dense.