In my Moneyweek column this week, I've been looking at how demographics changes our perception of the big economic trends. Here's a taster....
Unless you happen to be a hedge-fund manager specialising in high-velocity yak hide futures, most investors operate on long time horizons. Whether the Nikkei or the Footsie will be up or down a bit by the time spring comes around, or whether the dollar will finish the year up or down against the euro, no one really has any idea.
The best you can do is figure out what the long-term trends are, and you’re your investment decisions accordingly.
Over a twenty or thirty year view, most of us probably think we have a pretty good idea of where the world economy is going. China will rise into a position of global dominance, closely followed by the other BRIC economies of India, Brazil and Russia. Japan will continue its long slide into irrelevance. Europe is just about finished, although the mighty German export machine will keep powering ahead. The United States is in irretrievable long-term decline, sunk by debts, deficits, and imperial over-reach.
And yet the latest demographic research suggests that script is just about completely wrong. In fact, Japan is doing much better than most people think. China isn’t doing nearly as well. German strength is deceptive. The US is far better placed than you’d imagine. And, in Europe, Britain and France will be the highest-growth economies.
In the long-run, economics is basically demographics, with a few supply and demand charts thrown into the mix. A country’s GDP is determined by the number of working people, multiplied by their output. Output per worker varies depending on productivity growth, fairly obviously. But the number of workers varies as well. Partly that depends on the participation rate – that is, the numbers of people who go out and get jobs. Welfare systems make a difference to that: they can easily deter low-paid workers from looking for jobs. So do social trends: the number of women working has made a big difference to employment rates in all the developed countries.
But the number of workers depends most crucially on birth rates. Once your population goes into decline, it is very hard for your overall economy to grow. And if the population is growing, it’s hard for the economy not to.
How does that change the big global economic trends? Like this.
Forget all that stuff about Japan’s lost decade. It’s nonsense, pushed by Keynesian economics to justify printing lots of money. As Daniel Gros, the director of the Centre for European Policy Studies, has pointed out, Japan ‘never lost a decade’. When you divide GDP by the number of working age people (defined as everyone between 20 and 60) Japan did better in the last decade than the US, and better than most European counties as well. That certainly seems to chime with the evidence we can see all around us. If Japan is doing so badly, how come the roads are full of Toyotas and our houses full of Nintendo Wii’s and Sony TVs? If Japanese demand is so weak, why is unemployment only 5%, half the rate in the US and the eurozone?
In fact, Japan did as well as a wealthy, mature economy could be expected to. It would probably have done better if the Bank of Japan had listened less to academic Keynesians, and printed less money. Even so, the message is clear. Japan remains one of the most innovative, successful capitalist economies in the world – it’s just not going to show up in the GDP numbers because its population is falling.
Next, re-think China’s rise to global dominance. True, the country is rapidly industrialising. It’s a big place, and it is going to be a big player in the global economy. But how big? Right now, China is in a demographic ‘sweet spot’. The one-child policy means there aren’t many children. And past population growth means there aren’t many old people either. So in this decade China has an exceptionally high percentage of its population of working age. That is terrific for growth right now, but bad for the long-term. By 2030, China will have a greater percentage of pensioners to look after than the US. That is going to act a big drag on economic growth. And there won’t be much anyone can do about it.
The US, by contrast, will be in much better shape. True, America had been running big budget and trade deficits, and its banking system is in a terrible mess. But those are all short-term problems. The over-60s currently account for just 18% of the US population. That will only rise to 25% by 2050. The US has one of the highest birth rates in the developed world (14 births per 1,000 people annually, compared with 12 in the UK, or 8 in Germany). And, of course, it remains open to immigrants, at least compared to other rich countries. There will still be lots of bright, hard-working Americans joining the labour force every year for the foreseeable future, and they won’t be paying a fortune in taxes to support an army of pensioners. It’s hard to see how that can be bad for growth.
Lastly, re-think what you know about Europe. Germany has catastrophic demographics, and the country is increasingly suspicious of immigrants. A kink in the birth rates means the working age population has been stable since 2005, and will stay that way until 2015. Then it falls of a cliff. You can’t keep an export machine going when there aren’t any workers. France and the UK, by contrast, are set to dominate Europe – they are the only two major countries with stable or growing populations.
What should investors make of that? Simple. Don’t be too pessimistic about Japan. It’s in much better shape than you’ve been told. The China story is over-sold. The US is in much better shape than most people have acknowledged. France and Britain look pretty good too. Turn all of that into portfolio consisting of index-tracking funds following the Nikkei and the S&P 500, with a side position in the FTSE-100, and France’s CAC-40. Then come back and check how your investments are doing in 2030 – and you’ll almost certainly find they have done pretty well.