The blog has now been running for 11 years since the first post was written from Thailand at the end of June 2007. And quite a lot has happened since then:
Sadly, although central banks and commentators have since begun to reference the impact of demographics on the economy, they have not changed their basic belief that the right combination of tax and spending policies can always create growth.
As a result, the world has become a much more complex and confusing place. None of us can be sure what will happen over the next 12 months, given today’s rising geo-political tensions.
In times of short-term uncertainly, it can be useful to take a longer-term view. It is therefore perhaps helpful to look back at Chapter 4 of Boom, Gloom, which gave “Our 10 predictions for how the world would look from 2021:
- “A major shake-out will have occurred in Western consumer markets.
- Consumers will look for value-for-money and sustainable solutions.
- Young and old will focus on ‘needs’ rather than ‘wants’.
- Housing will no longer be seen as an investment.
- Investors will focus on ‘return of capital’ rather than ‘return on capital’.
- The term ‘middle-class’ when used in emerging economies will be recognised as having no relevance to Western income levels.
- Trade patterns and markets will have become more regional.
- Western countries will have increased the retirement age beyond 65 to reduce unsustainable pension liabilities.
- Taxation will have been increased to tackle the public debt issue.
- Social unrest will have become a more regular part of the landscape.
“The transition to the New Normal will be a difficult time. The world will be less comfortable and less assured for many millions of Westerners. The wider population will find itself following the model of the ageing boomers, consuming less and saving more. Rather than expecting their assets to grow magically in value every year, they may find themselves struggling to pay-down debt left over from the credit binge.
“Companies will need to refocus their creativity and resources on real needs. This will require a renewed focus on basic research. Industry and public service, rather than finance, will need to become the destination of choice for talented people, if the challenges posed by the megatrends are to be solved. Politicians with real vision will need to explain to voters that they can no longer expect all their wants to be met via endless ‘fixes’ of increased debt.
“We could instead decide to ignore all of this potential unpleasantness.
“But doing nothing is not a solution. It will mean we miss the opportunity to create a new wave of global growth from the megatrends. And we will instead end up with even more uncomfortable outcomes.”
Most of these forecasts are now well on the way to becoming reality, and the pace of change is accelerating all the time. It may therefore be helpful to include them in your planning processes for the 2019 – 2021 period, to test how your business (and your personal life) might be impacted if they become real.
THANK YOU FOR YOUR SUPPORT OVER THE PAST 11 YEARS
It is a great privilege to write the blog, and to be able to meet many readers at speaking events and conferences around the world. Thank you for all your support.
The post The blog’s 11th birthday – and a look forward to 2021 appeared first on Chemicals & The Economy.
Unsurprisingly, Friday’s US GDP report showed Q1 growth was just 0.7%, as the New York Times reported:
“The U.S. economy turned in the weakest performance in three years in the January-March quarter as consumers sharply slowed their spending. The result fell far short of President Donald Trump’s ambitious growth targets and underscores the challenges of accelerating economic expansion.”
And as the Wall Street Journal (WSJ) added:
“The worrisome thing about the GDP report is where the weakness was. Consumer spending grew at just a 0.3% annual rate—its slowest showing since the fourth quarter of 2009… As confirmed by soft monthly retail sales and the drop off in car sales, the first-quarter spending slowdown was real“.
The problem is simple. Economic policy since 2000 under both Democrat and Republican Presidents has been dominated by wishful thinking, as I discussed in my Financial Times letter last week.
The good news is that there are now signs this wishful thinking is finally starting to be questioned. As the WSJ reported Friday, BlackRock CEO Larry Fink, who runs the world’s largest asset manager, told investors:
“Part of the challenge the U.S. faces, Mr. Fink said, is demographics. Baby boomers, the largest living generation in the country are aging, reaching retirement age. “With our demographics it seems pretty improbable to see sustainable 3% growth.””
And earlier this year, the chief economist at the Bank of England, Andy Haldane, suggested that the importance of:
“Demographics in mainstream economics has been under-emphasized for too long.”
Policymakers should have focused on demographics after 2001, as the oldest Boomers (born in 1946) began to join the low-spending, low-earning New Old 55+ generation. The budget surplus created during the SuperCycle should have been saved to fund future needs such as Social Security costs.
But instead, President George W Bush and the Federal Reserve wasted the surplus on futile stimulus policies based on tax cuts and low interest rates. And when this wishful thinking led to the 2008 financial crisis, President Obama and the Fed doubled down with even lower interest rates and $4tn of money-printing via quantitative easing.
This wishful thinking has therefore created a debt burden on top of the demographic deficit, as the chart confirms:
Between 1966 – 1979, each $1 increase in US public debt created $4.49 of GDP growth, as supply and infrastructure investment grew to meet the needs of the Boomer generation
Debt still added to GDP in 1980 – 1999 during the SuperCycle: each $1 of debt created $1.15 of GDP growth
But since 2000, debt has risen by $13.9tn, whilst GDP has risen by just $4.6tn
Each $1 of new debt has therefore only created $0.33c of GDP growth – value destruction on a massive scale
It is therefore vital that President Trump learns from the mistakes of Presidents Bush and Obama. Further stimulus policies such as tax cuts will only make today’s position worse in terms of debt and growth. Instead, he needs to develop new policies that focus on the challenges created by today’s ageing population. as I suggested last August:
“3 key issues will therefore confront the next President. He or she:
□ Will have to design measures to support older Boomers to stay in the workforce
□ Must reverse the decline that has taken place in corporate funding for pensions
□ Must also tackle looming deficits in Social Security and Medicare, as benefits will otherwise be cut by 29% in 2030
It has always been obvious that the Fed could not possibly control the economic fortunes of 321m Americans. Common sense tells us that demographics, not monetary policy, drive demand. Unfortunately, vast amounts of time and money have been wasted as a result. The path back to fiscal sanity will be very hard indeed.”
US GDP growth is slowing, again, as the chart of the Atlanta Federal Reserve’s “GDP Now” forecast shows:
Forecast Q1 growth has slipped to just 0.6% from an initial 3.4% at the end of January
Consensus economic forecasts are still much higher, but even they have fallen to 1.7% from 2.2%
The decline has been accelerating, due to disappointing data from a range of key indicators. as the Atlanta Fed note:
“The forecast for first-quarter real GDP growth fell 0.4% after the light vehicle sales release from the U.S. Bureau of Economic Analysis and the ISM Non-Manufacturing Report On Business from the Institute for Supply Management on Wednesday and 0.2% after the employment release from the U.S. Bureau of Labor Statistics and the wholesale trade release from the U.S. Census Bureau this morning. Since April 4, the forecasts for first-quarter real consumer spending growth and real nonresidential equipment investment growth have fallen from 1.2% and 9.7% to 0.6% and 5.6% respectively.”
Worryingly, therefore, we seem to be repeating the usual pattern of disappointment – with New Year optimism being followed by harsh reality – as the US Federal Reserve’s deputy chairman, Stanley Fischer, noted nearly 3 years ago:
“Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back.”
The key issue, of course, is that policymakers have still not accepted that the US economy is inevitably moving into a low-growth mode, due to its ageing population. As the Chief Economist of the Bank of England, Andy Haldane noted recently, the impact of:
“Demographics in mainstream economics has been under-emphasized for too long”
There is little sign of the new policies that are urgently required to take account of the changes that have taken place in life expectancy and fertility rate. As a result, forecasts continue to be made on the basis of wishful thinking at the start of each New Year. As I noted in December:
□ Increasing life expectancy means people no longer routinely die around pension age. Instead, a whole New Old generation of people in the low spending, low earning 55+ generation is emerging for the first time in history. The average western BabyBoomer can now expect to live for another 20 years on reaching the age of 65
□ Fertility rates in the developed world have fallen by 40% since 1950. They have also been below replacement levels (2.1 babies per woman) for the past 45 years. Inevitably, therefore, this has reduced the relative numbers of those in today’s Wealth Creator cohort, just as the New Old generation is expanding exponentially
Friday’s US jobs numbers confirmed this obvious truth, as the second chart shows:
□ Less than 2/3rds of the US over-16s population now have jobs. The current percentage of 62.9% is back at 1978 levels – when the median age was 30 years, compared to today’s 38 years – and so relatively more young people were still in school and college
□ The picture for men is particularly worrying, with just 68.9% at work, an all-time low. The dcline seems to have accelerated since the Finanical Crisis began, with the participation rate falling from 73.2% in 2007
□ The percentage of women working is also still in decline, although at a slower rate. It is at 57.2% today compared to the 60% peak in 1999 before Boomer women began to retire
Even more worrying is the data shown on the 3rd chart, which highlights the changes in real wages, adjusted for inflation, since records began in 1979:
□ Average earnings in 2016 were only just higher than in 2009, at $347/week versus $345/week
□ Average earnings for men at $381/week are well below the peak of $402/week in 1979
□ Only women’s earnings are moving in the right direction, with 2016 at a new high of $312/week
□ But, of course, this highlights how women’s earnings still average only 82% of men’s earnings
It is no great surprise that US and global GDP continue to disappoint, given this evidence from the jobs market. And nothing will change until policymakers accept that today’s ageing populations require completely new policies.
If you want to know what is happening to the global economy, the chemical industry will provide the answers. It has an excellent correlation with IMF data, and also benefits from the fact it has no “political bias”. It simply tells us what is happening in real-time in the world’s 3rd largest industry. The chart above confirms the extremely high correlation:
It shows annual GDP % growth figures from the IMF on the vertical axis from 2000, including the 2016 forecast
The horizontal axis shows the annual change in Capacity Utilisation % data for the global chemical industry
The correlation is remarkable at 88%. Nothing that I have ever seen comes anywhere close to this level of accuracy.
The logic behind the correlation is partly because of the industry’s size. But it also benefits from its global and application reach. Every country in the world uses relatively large volumes of chemicals, and their applications cover virtually all sectors of the economy, from plastics, energy and agriculture to pharmaceuticals, detergents and textiles.
We can also use the data to look forward, given its timeliness, as the ACC also produce detailed reports on the major Regions and countries. And as the second chart shows, the outlook is unfortunately not good:
N America’s recovery since 2014 has faded away, and is at -1%; Latin America is very weak at -3.9%
W Europe has also slowed to 1.6%; Asia has collapsed from 7.5% in 2014 to just 1.4%
The Middle East/Africa has halved from 5.3% to 2.7%; only Central/Eastern Europe has grown, from 1.9% to 4.4%
This rather negative picture is in complete contrast with the official views of forecasters such as the IMF. They currently suggest that global growth will rebound from 3.1% in 2016 to 3.4% in 2017, and then move higher. But sadly, their optimism has been wrong for the past few years, as I noted in my Budget Outlook in October.
They have forecast a similar recovery every year since 2011, but growth has continued to slow.
The problem is that their models ignore the influence of demographics, and today’s ageing populations, on demand. The result, as the deputy chairman of the US Federal Reserve, Stanley Fischer, observed in 2014 is that:
“Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back.”
Clearly, it is encouraging that economists such as Andy Haldane at the Bank of England now recognise that demographics “have been under-emphasised for too long“. We can certainly hope that future forecasts may start to take account of the fact that older people do not consume as much as when they were young.
But in the meantime, it seems wise to take the chemical industry data very seriously.
It is clearly suggesting that the global economy is moving into a downturn. And whilst we must all hope this turns out to be wrong, hope is not a strategy. We also cannot ignore the major upheavals now underway in economic policy in both the USA and the UK, with President Trump taking office and the UK starting to leave the European Union.
These developments may well produce good results in the longer term. But in the short-term, they create major uncertainty. And if we look across the G20 countries – such as China, Russia, Brazil, India, S Africa, Saudi Arabia and Turkey – many are experiencing from similar political and economic uncertainty.
Uncertainty usually makes everyone – companies and consumers – more cautious in their spending. And lower spending inevitably means less growth.
“Will economists start to consider demographics when making their forecasts and developing government policies?”
This was the question on my mind at a recent discussion on the topic of “An economy that works for everyone” at the UK’s Institute for Government. The speaker was the Chief Economist of the Bank of England, Andy Haldane, and the Institute’s Director, Bronwen Maddox kindly invited me to ask my question as part of the discussion. You can watch the Q&A by clicking here. The transcript is below.
Critically, Haldane acknowledges that economists need to rethink their approach. Until now, they have focused on developing policies that impact “the average person”. Instead, he agrees that they now “need to be super-granular, household by household”, in terms of demographics and other relevant detail.
Andy Haldane is a leading central banker. His statement that “we shouldn’t have fixed views on how monetary policy works” is therefore very important. New ideas are urgently needed, and his comment opens the door for debate. As I have discussed here in earlier posts (Policymakers’ out-of-date economic models fail to create growth, again, Age range and income level key to future corporate profits), I believe there is an urgent need to develop an alternative economic model based on the ”competing populations” concept developed by the biologists.
“Andy. Thank you very much indeed for the stimulating talk. You made a comment just now about “is it something else” (that is causing the post-2008 recovery to be so slow and uncertain), and at the start you talked about the need perhaps to reinvent or rethink economics. You also made a point about the failure of conventional economics to explain this difference between the frontier companies (who are leading in their fields) and the others.
Just before Christmas the bank put out a survey of spending with relation to interest rates and monetary policy which suggested that again and I quote almost exactly “conventional economics would have said that if you pass on lower interest rates, people will spend more. “But in fact only 10% of people did. So what I wanted to ask you was,
“Is this something else” to do with really significant demographic changes in the economy – that we now have a group of BabyBoomers, the largest-ever group of people in the population, who are refusing to die at 65 as they would have done in the past. In fact they are living now for another 20 years, and we have around one in five of the population in that age group.”
My question really is therefore “do you think that investigating this demographic impact, which has never happened before in the world, could be useful”? Because I think that it might provide the key (a) to the new type of economics and also (b) to the question of how we raise UK productivity.
“Paul, your work on this is a very good example of how demographics in mainstream economics has been under-emphasized for too long.
That I think is changing by the way – that I think is changing and we are seeing for example when people tell the story that I mentioned earlier on about secular stagnation – the kind of Bob Gordon, Larry Summers-type hypothesis – one of the facts that is pointed towards would be demographic factors nudging us in that direction.
When we’re trying to make sense of why it is that interest rates globally – not ones set by central banks, ones set by financial markets – why they are so low, for as far as the eye can see, part of the explanation, I think, lies in evolving demographics and the implications that has about saving and for investment.
The study you mention, I think of households, which we conduct a regular basis to try and understand their patterns of spending and saving is, in some ways, a brief example of all we discussed today. It’s a vertical distribution. It’s saying we can’t take the average person, the so-called representative agent and hope that by studying them we can make sense of what’s going on. We need to be super-granular, household by household:
Conditioning on whether they are a borrower or a saver, whether they are young or whether they are old, whether they live in the North East or whether they live in the South West
And using that to condition our policy responses including our monetary policy responses
It could be the case we reach the point where interest rates are a bit less potent in stimulating spending than was the case in the past. We shouldn’t have fixed views or fixed multipliers about how monetary policy works.
It can change as the economy can change and by looking at this more granular data, like Michael Fish* did after 1987, we can perhaps tomorrow, or failing that the day after tomorrow, do a somewhat better job of making sense of what happens next in the economy.”
* Michael Fish was the BBC weather forecaster who famously denied on-air in October 1987 that a hurricane was about to hit the UK. Haldane had earlier noted that this failure had prompted a complete rethink of weather forecasting, which was now much better as a result. He hoped that economists’ failure to forecast the 2008 Crisis might end up causing a similar process of rethinking and reinvention to take place.