If a country doesn’t have any babies, then in time it won’t have an economy. But that’s not how the central banks see it.
For the past 20 years, through subprime and now their stimulus policies, they have believed they could effectively “print babies”. Even today, they are still lining up to take global interest rates even further into negative territory.
But common sense tells us their policy cannot work:
- New data shows 2018 births in the G7 richest Western countries were just 7.8m
- This was the lowest level seen since records began in 1921
- It was even lower than at the height of the Depression in 1933 when births dropped to 7.99m/year
- By comparison during the 1946-70 BabyBoom, they averaged 10.1m/year and peaked at 10.6m
The chart above confirms the unique nature of the Western BabyBoom. Births jumped by 15% versus the previous 25 years, and since then they have fallen by an average 17%. Every single country is now having fewer births than at the peak of the Boom:
- US births were 3.79m last year, versus a peak of 4.29m in 1959
- Japan had 0.92m versus 2.7m in 1949; Germany had 0.79m versus 1.36m in 1963
The BabyBoom mattered because the Boomers were part of the richest society the world has ever seen. In 1950, the G7 were half of the global economy, and they were still 45% in 2000. The “extra babies” born during the Boom, effectively created a new G7 economy the size of Canada.
But since 1970, the West has not been replacing its population, as fertility rates have been below 2.1/babies per woman. This matters, as the second chart shows for the USA, the world’s largest economy.
Consumer spending is 70% of GDP, and it peaks in the 25-54 Wealth Creator generation – when people are building their careers and often settle down and have children. Spend then drops by over 40% by the age of 75.
This didn’t matter very much for the economy in the past, when most people died around pension age:
- In 1950, for example, there were just 130m Westerners in the Perennials 55+ age group. By comparison, there were 320m Wealth Creators and 360m under 25
- But today, there are 390m Perennials compared to 515m Wealth Creators and just 350m under-25s
This means it is impossible to recreate the growth of the Boomer-led SuperCycle.
Does this matter? Not really.
Most of us would prefer to have the extra 15-20 years of life that we have gained since 1950. But because policymakers have pretended they could print babies via their stimulus programmes, they were able to avoid difficult discussions with the electorate about the impact of the life expectancy bonus.
Now, this failure is catching up with them. Perennials are, after all, effectively a replacement economy. They already own most of what they need, and their incomes decline as they move into retirement. So we need to adjust to this major change:
- In 1950, it was normal for people to be born and educated, before working to 65 and then dying around pension age
- Today, we need to add a new stage to this paradigm – where we retrain around the age of 55, probably into less physically demanding roles where we can utilise the experience we have gained
- This would have tremendous benefits for individuals in terms of their physical and mental health and, of course, it would reduce the burden on today’s relatively fewer Wealth Creators
- It is completely unfair, after all, for the Boomers to demand their children should have a lower standard of living, and instead support their parents in the Perennials cohort
There is, of course, one other fantasy peddled by the central banks as part of their argument that monetary policy can always create growth.
This is that the emerging economies have all now become middle class by Western standards, and so global growth is still going to power ahead. But as the third chart shows, this simply isn’t true:
- It shows the world’s 10 largest economies (the circle size) ranked by fertility rate and median age
- Only India still has a demographic dividend, with its fertility rate just above replacement levels
- But India’s GDP/capita is only $2036: Brazil’s is just $8968 and China’s $9608
- By comparison, the US is at $62606, Germany is at $48264 and France/UK are at $42600
Companies and voters have been completely fooled by these claims of a “rising middle class” in the emerging economies. In reality, most people have to live on far less than the official US “poverty level” of $20780 for a 3-person household.
In China, average disposable income in the major cities was just $5932 last year, and only $2209 in the poorer rural half of the country. Its great success has actually been to move 800m people out of extreme poverty (income below $1.90/day) since 1990.
Demographics don’t lie, and they clearly challenge the rose-tinted view of the central banks that further interest rate cuts will somehow return us to SuperCycle days.
Their real legacy has been to create record levels of debt, which can probably never be repaid.
Women in most parts of the world are not having enough children to replace our population. This is one of the great issues of our time, but is hardly ever discussed.
Yet the issue is very topical, with Chinese births falling to a 60-year low last year. Only 15.23 million babies were born, the lowest level since 1961 when the population was 654 million, less than half today’s 1.4bn. Soon, deaths will start to overtake births – as they have already in Japan.
It used to be thought that China was a special case due to its “one child policy”, pictured above. But this law was relaxed in 2015. And although births did rise in 2016, as some couples took advantage of the new law, forecasts that births could reach 23m in 2018 have proved completely wrong.
FERTILITY RATES HAVE COLLAPSED AROUND THE WORLD
China is not alone, however, in seeing its fertility rates collapse, as the chart of the world’s 10 largest economies confirms. It shows the number of babies/woman being born since 1950, based on UN Population Division data:
- Asia. China’s rate has fallen from 6 to 1.6; India from 5.9 to 2.2; Japan from 3 to 1.5
- Americas. Brazil has fallen from 6.1 to 1.7; Canada from 3.6 to 1.6; USA from 3.3 to 1.9
- Europe. The UK has fallen from 2.2 to 1.9; Italy from 2.4 to 1.5; France from 2.8 to 2; Germany from 2.1 to 1.5
So only India is now above the replacement level of 2.1 babies/woman. And probably this will change within the next 5 – 10 years as latest national data shows that 12 states are already below replacement levels, whilst urban areas are at just 1.8 babies/woman.
Of course, part of the reason is increasing life expectancy – women don’t need to have a baby every year to ensure someone is there to look after them when they grow old.
This was critical even 200 years ago, when life expectancy was just 30 years. But after the discovery of smallpox vaccination, Rising life expectancy enabled the Industrial Revolution to occur and today, life expectancy has more than doubled.
In turn, of course, today’s ageing populations are creating major headwinds for growth, as I discussed in Economic policy needs to focus on impact of the 100-year life. This is particularly critical in wealthier countries, given that the West faces a demographic deficit as population ages.,
But another key – and related – issue is the collapse in fertility rates itself.
POLICIES HAVE TO CHANGE IF FERTILITY RATES ARE TO RECOVER
It is easy to forget today that it is only within the last 100 years that men began to accept that women could play a full role in society. It was exactly a century ago, for example, that resistance to the idea of women voting began to crumble.
The catalyst for change was World War 1. With men having gone to fight, women had to be allowed to leave the home and go to work. And when the men came back, they felt unable to stop the move to allow women to vote. But this didn’t stop men enforcing marriage bars until the 1960s.
These meant that Western women would routinely lose their job when they got married, on the grounds that “it was the man’s job to earn the income, whilst the woman stayed at home with the children“. And, of course, women’s lives and ambitions were still restricted in a vast number of ways.
THE COST OF HAVING CHILDREN IS TOO HIGH FOR MANY WOMEN
Today, the collapse of fertility rates should be seen as a critical issue for society. Of course, not every woman wants to have children. But for those that do, there are at least 2 types of cost that currently discourage them.
One “cost” is simply the high cost of living. In China, for example, Caixin notes that
“High parenting costs are severely inhibiting. For example, in a typical Chinese middle-class family, the average annual cost of raising a child is about 30,000 yuan ($4,400).”
This is higher than China’s average per capita disposable income at just $4165 in 2018, according to government data.
But there is another “cost” that women have to face if they want to have children. This is that job conditions are still based on the pre-1960 pattern. As a recent survey by the UK parenting site, Mumsnet, reports:
“Three-quarters of parents found flexible working — including part-time hours, job shares and reduced hours during school holidays — more important to them than perks such as health insurance and gym membership, and more than half of them valued it over getting a pay rise.”
Tech companies seem particularly bad in this area, as one mother wrote recently about working at Facebook:
“I love my job, but I love my baby even more. When I told Facebook I wanted to work from home part-time, HR was firm: You can’t work from home, you can’t work part-time, and you can’t take extra unpaid leave…..Zuckerberg said he was sorry I was leaving.”
Most companies still operate a version of the same out-of-date policies. It’s time that they, and governments, began to wake up to the consequences. Common sense tells us that everyone would benefit from introducing more flexible working arrangements. And it is also the only way that we will get back to replacing our population, before it is too late.
Many indicators are now pointing towards a global downturn in the economy, along with paradigm shifts in demand patterns. CEOs need to urgently build resilient business models to survive and prosper in this New Normal world, as I discuss in my 2019 Outlook and video interview with ICIS.
Global recession is the obvious risk as we start 2019. Last year’s hopes for a synchronised global recovery now seem just a distant memory. Instead, they have been replaced by fears of a synchronised global downturn.
Capacity Utilisation in the global chemical industry is the best leading indicator that we have for the global economy. And latest data from the American Chemistry Council confirms that the downtrend is now well-established. It is also clear that key areas for chemical demand and the global economy such as autos, housing and electronics moved into decline during the second half of 2018.
In addition, however, it seems likely that we are now seeing a generational change take place in demand patterns:
- From the 1980s onwards, the demand surge caused by the arrival of the BabyBoomers into the Wealth Creating 25 – 54 cohort led to the rise of globalisation, as companies focused on creating new sources of supply to meet their needs
- At the same time the collapse of fertility rates after 1970 led to the emergence of 2-income families for the first time, as women often chose to go back into the workforce after childbirth. In turn, this helped to create a new and highly profitable mid-market for “affordable luxury”
- Today, however, only the youngest Boomers are still in this critical generation for demand growth. Older Boomers have already moved into the lower-spending, lower-earning 55+ age group, whilst the younger millennials prefer to focus on “experiences” and don’t share their parents’ love of accumulating “stuff”
The real winners over the next few years will therefore be companies who not only survive the coming economic downturn, but also reposition themselves to meet these changing demand patterns. A more service-based chemical industry is likely to emerge as a result, with sustainability and affordability replacing globalisation and affordable luxury as the key drivers for revenue and profit growth.
Please click here to download the 2019 Outlook (no registration necessary) and click here to view the video interview.
“The 1950-2000 period is like no other in human or financial history in terms of population growth, economic growth, inflation or asset prices.”
This quote isn’t from ‘Boom, Gloom and the New Normal: How Western BabyBoomers are Changing Demand Patterns, Again‘, the very popular ebook that John Richardson and I published in 2011. Nor is the chart from one of the hundreds of presentations that we have since been privileged to give at industry and company events around the world.
It’s from the highly-respected Jim Reid and his team at Deutsche Bank in their latest in-depth Long-Term Asset Return Study, ‘The History (and future) of inflation’. As MoneyWeek editor, John Stepek, reports in an excellent summary:
“The only economic environment that almost all of us alive today have ever known, is a whopping great historical outlier….inflation has positively exploded during all of our lifetimes. And not just general price inflation – asset prices have surged too. What is this down to? Reid and his team conclude that at its root, this is down to rampant population growth.” (my emphasis)
As Stepek reports, the world’s population growth since 1950’s has been far more than phenomenal:
“From 5000BC, it took the global population 2,000 years to double; it took another 2,000 years for it to double again. There weren’t that many of us, and lots of us died very young, so it took a long time for the population to expand. Fast forward another few centuries, though, and it’s a different story.
“As a result of the Industrial Revolution, lifespans and survival rates improved – the population doubled again in the period between 1760-1900, for example. That’s just 140 years. Yet that pales compared to the growth we’ve seen in the 20th century. Between 1950-2000, a mere 50 years, the population more than doubled from 2.5bn to 6.1bn.”
Actually, it was almost certainly Jenner’s discovery of smallpox vaccination that led to the Industrial Revolution, as discussed here in detail in February 2015, Rising life expectancy enabled Industrial Revolution to occur’:
“Vaccination against smallpox was almost certainly the critical factor in enabling the Industrial Revolution to take place. It created a virtuous circle, which is still with us today:
- Increased life expectancy meant adults could learn from experience instead of dying at an early age
- Even more importantly, they could pass on this experience to their children via education
- Thus children stopped being seen as ’little adults’ whose role was to work as soon as they could walk
- By 1900, the concept of ‘childhood’ was becoming widely accepted for the first time in history*
The last point is especially striking, as US sociologist Viviana Zelizer has shown in Pricing the Priceless Child: The Changing Social Value of Children. We take the concept of childhood for granted today, but even a century ago, New York insurance firms refused to pay death awards to the parents of non-working children, and argued that non-working children had no value.
Deutsche’s topic is inflation, and as Stepek notes, they also take issue with the narrative that says central banks have been responsible for taming this in recent years:
“The Deutsche team notes that inflation became less fierce from the 1980s. We all think of this as being the point at which Paul Volcker – the heroic Federal Reserve chairman – jacked up interest rates to kill off inflation. But you know what else happened in the 1980s?
“China rejoined the global economy, and added a huge quantity of people to the working age population. A bigger labour supply means cheaper workers. And this factor is now reversing. “The consequence of this is that labour will likely regain some pricing power in the years ahead as the supply of it now plateaus and then starts to slowly fall”.”
THE CENTRAL BANK DEBT BUBBLE IS THE MAIN RISK
The chart above from the New York Times confirms that that the good times are ending. Debt brings forward demand from the future. And since 2000 central banks have been bringing forward $tns of demand via their debt-based stimulus programmes. But they couldn’t “print babies” who would grow up to boost the economy.
Today, we just have the legacy of the debt left by the central banks’ failed experiment. In the US, this means that the Federal government is almost at the point where it will be spending more on interest payments than any other part of the budget – defence, education, Medicaid etc.
Relatively soon, as the Congressional Budget Office has warned, the US will face decisions on whether to default on the Highway Trust Fund (2020), the Social Security Disability Insurance Trust Fund (2025), Medicare Hospital Insurance Trust Fund (2026) and then Social Security itself (2031). If it decides to bail them out, then it will either have to make cuts elsewhere, or raise taxes, or default on the debt itself.
THE ENDGAME FOR THE DEBT BUBBLE IS NEARING – AND IT INVOLVES DEFAULT
Global interest rates are already rising as investors refocus on “return of capital”. Investors are becoming aware of the risk that many countries, including the USA, could decide to default – as I noted back in 2016 when quoting William White of the OECD, “World faces wave of epic debt defaults” – central bank veteran:
“It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something. The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians.”
The next recession is just round the corner, as President Reagan’s former adviser, Prof Martin Feldstein, warned last week. This will increase the temptation for Congress to effectively default by refusing to raise the debt ceiling. Ernest Hemingway’s The Sun also Rises probably therefore describes the end-game we have entered:
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
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It’s 10 years since my forecast of a global financial crisis came true, as Lehman Brothers collapsed. I had warned of this consistently here in the blog, and in the Letters column of the Financial Times. But, of course, nobody wanted to listen whilst the party was going strong. As the FT’s world trade editor wrote at the time, commenting on the Queen’s question “Why did nobody see this coming”:
“Why didn’t people see it coming? Some did, Ma’am. Some did. But it doesn’t mean they were listened to. And there is a long history of people in authority running up vast debts without public accountability and eventually losing their heads. Let’s just try and get through this one without a civil war, shall we?”
That rationale, I understood. I was the “party pooper” warning of crisis for nearly 2 years. But people didn’t want warnings. And, of course, until we got to March 2008 and Bear Stearns collapsed, I couldn’t answer their all-important question, “When is this going to happen?”.
If you take the 4 great questions of life – Why, What, How and When – the ‘When’ question is really the least important:
- If you know ‘Why’ something is going to happen, ‘What’ it involves and ‘How’ it will impact, then ‘When’ is simply the detail that confirms the analysis was right
- But if you don’t want to know about a problem, its the easiest thing in the world to dismiss it by arguing “your comment is no use to me, unless you can tell me when its going to happen”
But I admit that what did surprise me, after John Richardson and I had written Boom, Gloom and the New Normal: how the Western BabyBoomers are Changing Demand Patterns, Again, was that people really liked our analysis of the impact of demographic change on the economy – but still ignored its implications for their business and the economy.
The above chart is a good example, showing the latest data from the US Consumer Expenditure Survey. It confirms what common sense tells us:
- Household spending is closely linked to age
- Housing expenditure is the biggest single expense for most people, and peaks between the ages of 35-54
- Transport and food & drink are the next largest spend, and peak at the same ages
- Health expenditure, on the other hand, peaks as one gets older
This is critical information for central bankers, companies and investors, given that consumer spending is 60%-70% of GDP in most developed countries.
Yet the only central banker who took it seriously, Masaaki Shirikawa, Governor of the Bank of Japan, was promptly sacked after premier Abe came to power. Printing money seemed so much easier than having difficult but essential discussions with voters about the impact of an ageing population, but as Shirikawa noted:
“The main problem in the Japanese economy is not deflation, it’s demographics. The issue is whether monetary policy is effective in restoring economic recovery. My observation is, it is quite limited.”
Equally, the second chart confirms that the US is also a rapidly ageing society, with 20m households having moved into the 55+ age range since 2000. And whilst the 55+ group’s spending has increased over the period, this is only because many of the younger BabyBooomers are still in their 50s or early 60s. So whilst their spend is declining, it hasn’t yet suffered the 43% fall that occurs after the age of 75 (by comparison with the peak spending 45-54 period).
Yet policymakers still insist that the 2008 crisis was all about liquidity, and had nothing to do with the impact of today’s ageing populations on spending and economic growth. And most companies also still plan for “business as usual”.
SO WHAT HAPPENS NEXT, AS THE DEBT BURDEN GROWS?
For obvious reasons, I disagree with these views. Of course, it would be lovely to find that today’s record levels of debt – created in the vain attempt to stimulate growth – could be made to simply disappear. I have read analyses by learned commentators arguing that central banks can simply “write off” their debt, and it will magically disappear.
But I have never yet found a bank or credit card company prepared to “write off” any debt that I owe them in this way. (If you know of one, please let me know, and I will pass on the details). And most of us know from personal experience that interest costs soon mount up, if you can’t pay the debt at once and have to finance it for a while.
So its quite clear that today’s record levels of debt create massive headwinds for future growth. At $247tn, it now amounts to 318% of global GDP. In reality, only two choices lie ahead:
- The past decade’s borrowing brought forward consumption from the future, so repaying the debt means growth will slow very dramatically – adding to the demand deficit created by today’s globally ageing populations
- Failing to pay back the debt risks creating chaos in financial markets, as we are starting to see with the crises in Argentina and Turkey, as lenders suddenly realise their loans cannot be repaid
But, of course, I can’t yet say exactly ‘When?’ this simple fact will finally impact the economy and markets. For the moment, as between 2006 – March 2008, I can only tell you:
‘Why?’ it is going to happen, ‘What?’ it involves and ‘How?’ you can recognise the warning signs.
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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.
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