Financial crises and the five stages of loss

The Financial Times has kindly printed my letter as their lead letter, arguing that the rise of the populists emphasises the risk of continuing to deny the impact of today’s ageing populations on the economy.

Sir,  Martin Wolf’s sobering analysis of policymakers’ post-crisis decision to “go back to the past”, ( “Why so little has changed since the financial crash”, September 5), brings to mind the celebrated “Paradigm of Loss” model developed by Elizabeth Kübler-Ross. Originally designed to describe how people come to terms with loss and death, it has since been more widely applied, including to economic and financial market developments.

His description of the post-1918 period appears to be a classic example of the paradigm’s denial stage, with policymakers ignoring the economic impact of the earlier carnage. Young people are the prime source of future demand as they enter the wealth creator 25-54 age group, when people typically settle down, have children and develop their careers. The war cruelly destroyed the lives of millions of young men before they could realise this potential.

As the paradigm would suggest, this denial then led to anger, and the rise of fascism and communism. This proved so intense that the next stage, bargaining, was delayed until 1945, when the adoption of Keynes’s new thinking finally allowed the cycle to complete.

Today, we are again seeing a demand deficit created by demographic change. Thankfully, it is not due to war, but to the post-1945 increase in life expectancy and collapse in fertility rates. Inevitably, therefore, consumer spending — the motor of developed economies — is now slowing as we have an ageing population for the first time in history. Older people already own most of what they need, and their incomes decline as they retire.

Just as in 1918, this means we need new policies to create “a better future”, as Mr Wolf notes. In their absence, the rise of the populists suggests that we instead risk moving into a new anger phase. It is not yet too late for new thinking to emerge, but time is starting to run out.

Paul Hodges

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Older workers are looking for something more

The Financial Times has kindly printed my letter arguing that we need new policies to help people adapt to their extra decade or more life expectancy.

Sir, There is another angle to Janan Ganesh’s interesting exploration of whether “Liberals risk the charge of complacency” (February 20). This is the question of why the policy elite has failed to go beyond congratulating itself for the successes cited by Professor Steven Pinker in his new book, Enlightenment Now.

Increasing life expectancy is just one example of the policy vacuum that has developed following the vast improvements seen since the second world war. Globally, longevity has increased by 50% since 1950, giving the average person an extra 24 years of life, according to UN Population Division data. In the developed world, life expectancy no longer coincides with retirement age, but instead offers the potential for a decade or more of extra life.

Yet where are the policy changes that would help people to adapt to this unprecedented shift in expectations? Where are the retraining options for people in their fifties and sixties that would help employees take up new careers when they become bored with their existing roles, or physically unable to continue with them? Where are the social policies that would enable them to continue contributing to society? Where are the financial policies to incentivise them to pass on the skills and expertise they have developed to younger generations?

The issue is most acute in the developed world, where the proportion of older people in the 55-plus age range has doubled to 32% compared with 1950. As Mr Ganesh rightly points out, they are looking for something beyond simple economic comfort and the arrival of bus passes and fuel allowances. Liberals should perhaps not be so surprised that their failure to address this critical issue has left the door open for populists to fill the policy vacuum.

Paul Hodges

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Recession the base case scenario for 2017

ICB Jan17

It is hard to be optimistic about the outlook for 2017.

The good news is that policymakers are finally giving up on the idea that stimulus can somehow return us to the growth levels seen when the Baby Boomers were young.  As the Bank of England note in a new Report:BoE Dec16a

  ”Economic theory suggests that a fall in interest rates should lead to higher household spending, because lower returns on savings decrease the amount of future consumption that can be achieved by sacrificing a given amount of spending today
  But as the chart shows, “when asked about how they might respond to a hypothetical further fall in mortgage payments, households reported that paying off debt and saving more were likely to be a more common response than increasing spending”
  45% said they would save more, 50% said they would use money saved on mortgage payments to pay down debt and only 10% said they would increase their spending.

Unfortunately, companies and investors will now pay the costs of this failed experiment, as markets return to being based on supply and demand fundamentals, rather than central bank money-printing.   Five major risks face the global economy, as my new 2017 Outlook highlights:

 Global recession: The American Chemistry Council (ACC) index of global capacity utilisation is the best indicator that exists in terms of the outlook for the economy. As I noted last month, it has been falling since December 2015, and its latest reading is close to the all-time low seen in March 2009
□  Populist policies are gaining support: Populists provide simple answers to complex questions, and 2016 saw them gain major success with the Brexit vote for the UK to leave the EU, Donald Trump winning the US Presidency, and Italy’s referendum creating the potential for the country to vote on leaving the euro
□  Protectionism is replacing globalisation: One key result of these changes is that countries are turning inwards. The Doha and Transatlantic Trade and Investment Partnership trade deals are effectively dead, and President-elect Trump has promised to cancel the Trans-Pacific Partnership deal on coming into office
□  Interest rates are rising around the world: Investors have begun to worry about return of capital, rather than just return on capital. Benchmark 10-year interest rates have doubled in the US since the summer. They have also trebled in the UK and doubled in Italy, while negative rates in Germany and Japan have turned positive again.
□  India’s economy is under major strain as a result of the currency reforms, and China’s debt levels remain far too high for comfort. Its housing bubble in the Tier 1 cities has reached price/earnings ratios double those of the US subprime bubble.  Its currency is also falling as the economy slows, creating the potential for further trade friction with the new Trump administration

Please click here if you would like to read the full Outlook, and click here to view my 6 minute interview with ICB’s deputy editor, Will Beacham.  You can also click here to download a copy of all my New Year forecasts since 2008, when I was warning of a coming financial crash.

 

Economic policy needs to focus on impact of the 100-year life

Right direction Nov16Nearly two-thirds of people in the world’s top 25 countries feel their country is heading in the wrong direction, according to a new poll from Ipsos MORI.  As their chart shows:

  China, Saudi Arabia, India, Argentina, Peru, Canada and Russia are the only countries to record a positive feeling
  The other 18 are increasingly desperate for change

The poll confirms that the UK’s Brexit vote, and Donald Trump’s election, were just early signs of the fact that most people feel the current economic/political/social system is not working for them.  Worryingly, given the votes due over the next 6 months, the poll shows that French adults (89%), Italians (82%) and Germans (69%) are even more upset than American (63%) and British voters (60%).

This highlights the fact that none of our political leaders are prepared to tackle the really critical issue of our time – how does the world cope with the combination of vastly increased life expectancy and the collapse of fertility rates?

  In 1850, average Western life expectancy was around 40 years
  Increasing life expectancy meant that by 1950, this had become the start of middle age
  Today, anyone aged 40 is only half-way through their expected life
  By 2050, on current trends, average life expectancy will be around 100 years

This change would be dramatic enough on its own.  But it is being accompanied by a collapse in fertility rates.  These have been below replacement levels of 2.1 babies/woman since 1970, meaning that there is a growing shortage of people in the economically critical Wealth Creator 25 – 54 age group.

It is therefore no surprise that GDP growth is unimpressive.  The New Old 55+ generation already own most of what their need, and their incomes decline as they enter retirement.  Essentially, therefore, the ageing of the BabyBoom generation means that we have traded 10 years of extra life expectancy for growth.

I haven’t met anyone who is unhappy – from a personal viewpoint – with this trade.  The problem is that policymakers chose to ignore the social, political and economic consequences.  Instead they tried to compensate for this slower growth by printing money.  But all this has done is to create vast levels of debt, which can never be repaid.

100 year life

The second chart highlights the longer-term background to today’s position.  It shows Western life expectancy versus GDP/capita, and highlights the dramatic nature of the changes now underway.  These began in 1796 when Edward Jenner’s discovery of smallpox vaccination suddenly changed life expectancy:

  200 years ago, life expectancy was 35 years in the developed world.  Smallpox infected 60% of the population – and 20% died of it. But after 1796, life expectancy began to rise quite rapidly. As a result, the life cycle began to change.  No longer were people born, then usually worked from an early age, and then died – instead an education stage was added, and GDP rose as parents could pass on learning to their children
  100 years ago, life expectancy had reached 50 years, and the Western economy was growing fast in terms of GDP/capita – leading Germany and then the UK to introduce the concept of the pension.  This added another new stage to the life cycle as people were born, educated, worked, retired and then died. But the number of pensioners was still small, 600k in the UK out of a 43 million population
  Today, Western life expectancy is around 80, and is around 20 years at age 65.  And due to the collapse of fertility rates, a G7 economy such as Italy will soon have nearly as many people in the New Old 55+ cohort as in the Wealth Creator 25 – 54 cohort.  Another new stage needs to be added to the life cycle – where we are born, are educated, work, and then retrain in our 50s/60s, before working again until we retire and then die

This is the key economic, political and social issue of our time. And until policymakers wake up to its implications, the Populists will continue to triumph.  Ordinary people are not stupid.  They can see that stimulus programmes don’t produce the promised results.  As the poll shows, they understand that we are going in the wrong direction.

Today, we therefore need leaders with vision and common sense to set out a plan for living in a world where the 100-year life is becoming normal.

World’s demographic dividend turns to deficit as populations age

New Old Top 10 Apr14We are living in a world of ageing populations for the first time in history.  For many, this conjures up a picture of vast numbers of old people leaning on walking sticks with one hand, and swallowing mouthfuls of pills with the other.

But reality is a long way from this stereotype.

LIFE EXPECTANCY HAS SUDDENLY INCREASED IN THE PAST 200 YEARS
As I discussed last month, vaccination against smallpox was the first crucial enabler for increased life expectancy:

  • It was the starting point for a doubling of Western life expectancy from 36 years in 1820 to 80 years today
  • The benefits of vaccines, water chlorination and healthier lifestyles have added decades to life expectancy
  • In addition, increased life expectancy meant adults could pass on their learning to the younger generation

More recently, the same effect has begun to be seen in the emerging economies.  Since 1950, their life expectancy has increased by 60% from 42 years to 68 years today.

Globally, this means that life expectancy has risen 50% since 1950 to reach 70 years today.

THE OVER-55 AGE GROUP IS NOW GROWING VERY FAST
The chart above highlights the truly dramatic increase in the size of the over-55 age group in the world’s 10 largest economies – responsible for around two-thirds of global GDP:

UN data shows there were just 185 million in this age group in 1950.  But by 2000, there were 500m people aged 55+ in these ‘Top 10 economies’.  This was a 2.5-fold increase in just 50 years.

And today, the numbers are rising even faster, due to the impact of the global BabyBoom from 1946 – 1970.

The reason is that fertility rates were still relatively high in the BabyBoom period, as I discussed last week.  And increased life expectancy means most of these Boomers are still alive today, and joining wha we can call the New Old 55+ generation:

  • There are now 750m New Olders in the ‘Top 10 economies’, an increase of 250m people in just 15 years
  • And by 2025, all the Boomers will be New Olders, adding another 225m to the total
  • By then, there will be a total of 975m in the New Old generation, versus 185m in 1950 – a five-fold increase

Global trends follow the same pattern.  So by 2025, the world will have 1.6bn New Olders, compared to just 300m in 1950 – also a five-fold increase.

So we have gained the fantastic benefit of a major increase in life expectancy.  And contrary to the stereotype, the New Olders are NOT people using walking sticks with one hand, whilst they swallow pills with the other.

Yet we all still intuitively retain the mindset of the 1950s, and assume people will die soon after retirement.  We ignore the fact that Westerners who reach the age of 65, likely have another 20 years of life ahead of them.  And we still insist on seeing the post-65 period as simply a very lengthy period of retirement.

This failure to change our mindset means that the demographic dividend created by the BabyBoom is now becoming a very serious demographic deficit.  Today’s relatively small number of young people have not only to support themselves and thir children – but also the older generation in their 20-year retirement via their taxes.

I will look at the impact of this in more detail next Friday.

Ageing UK households’ impact on growth

My new post for the Financial Times FT Data blog highlights how household spending is very dependent on age.

Guest post by Paul Hodges| Jan 29 11:28 |
The UK’s ageing population is creating major headwinds for economic growth, data published last month by the Office of National Statistics shows.
The issue is simple: the ageing of the Baby Boomers means most UK households are now headed by someone more than 50 years old. On average, these households spend almost 20 per cent than less those headed by younger people. Consumer spending is around two-thirds of GDP, and so this ongoing shift in spending patterns is inevitably impacting the economic outlook.Two key facts provide the necessary context. One is that the majority of UK households have been headed by someone more than 50 years old since 2002. The second is that average household expenditure (in £2013) has now been in steady decline since 2006.

This chart highlights how these trends have developed:

UK household spending

The majority of UK households are now headed by someone aged over-50. In 2013, there were 14.6 million in this segment, compared to just 12.3 million headed by the under-50s. These older households spend less that younger ones. Average spend by those in the older age group was just £24k in 2013, compared to the £30k averaged by the under-50s. As a result, total spending by the larger segment of 50+ households at £354 billion was slightly less than the smaller, younger segment’s $368 billion.

These trends seem likely to continue. The ongoing decline in fertility rates continues to reduce the size of the highest-spending cohort, those aged 30-49. Their numbers have fallen from 9.8 million in 2000 to 9.6 million in 2013. At the same time, increasing life expectancy has led to an increase in the size of the 50-64 age group from 6.2 million to 7.1 million over the same period. Even more remarkably, the number in the very low-spending 75+ cohort has jumped by almost a quarter to 3.6 million, and their average spend is less than half of the 30-49 cohort.

Chart: Spending by age and category

This chart highlights how spending declines across all major categories past the age of 50. Peak spending takes place in the 30-49 cohort, when people are settling down, often starting a family, and seeing their careers and earnings develop. But after 50, spending reduces as the children leave home and their incomes decline as they enter retirement.

The two largest areas, housing and transport, see an immediate decline as people move into their 50s. In others, such as recreation and food & drink, the decline is delayed until they reach 65+. Overall, total spend by the 50-64 cohort averages 93 per cent of peak spending, whilst spend by the 65+ cohort is only three-quarters of the peak.

It is hard to see how these trends can be mitigated by policymakers. Today’s 65-year-olds now benefit from an extra decade of life expectancy compared to 1950, when they were born. But no political party is likely to go into May’s general election with a promise to immediately increase retirement age by 10 years to balance this.

The ONS data thus highlights the major challenge faced by policymakers, as they seek to restore economic growth to the SuperCycle levels seen when the Baby Boomers were in their prime spending years.

Paul Hodges is the co-author of Boom, Gloom and the New Normal: How the Western Baby Boomers are Changing Demand Patterns, Again. www.new-normal.com