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.
Is global economic growth really controlled by monetary policy and interest rates? Can you create constant growth simply by adjusting government tax and spending policy? Do we know enough about how the economy operates to be able to do this? Or has something more fundamental been at work in recent decades, to create the extraordinary growth that we have seen until recently?
- As the chart shows for US GDP, regular downturns used to occur every 4 or 5 years
- Then something changed in the early 1980s, and recessions seemed to become a thing of the past
- Inflation, which had been rampant, also began to slow with interest rates dropping from peaks of 15%+
- For around 25 years, with just the exception of the 1st Gulf War, growth became almost constant
Why was this? Was it because we became much cleverer and suddenly able to “do away with boom and bust” as one UK Finance Minister claimed? Was it luck, that nothing much happened to upset the global economy? Was it because the Chairman of the US Federal Reserve from 1986 – 2006, Alan Greenspan, was a towering genius? Perhaps.
THE AVERAGE BABYBOOMER IS NOW 60 YEARS OLD
Or was it because of the massive demographic change that took place in the Western world after World War 2, shown in the second chart?
- 1921 – 1945. Births in the G7 countries (US, Japan, Germany, France, UK, Italy, Canada) averaged 8.8m/year
- 1946 – 1970. Births averaged 10.1m/year, a 15% increase over 25 years
- 1970 – 2016. Births averaged only 8.5m/year, a 16% fall, with 2016 seeing just 8.13m born
Babies, as we all know, are important for many reasons.
Economically, these babies were born in the wealthy developed countries, responsible for 60% of global GDP. So right from their birth, they were set to have an outsize impact on the economy:
- Their first impact came as they moved into adulthood in the 1970s, causing Western inflation to soar
- The economy simply couldn’t provide enough “stuff”, quickly enough, to satisfy their growing demand
- US interest rates jumped by 75% in the 1970s to 7.3%, and doubled to average 10.6% in the 1980s
- But then they began a sustained fall to today’s record low levels as supply/demand rebalanced
BOOMERS TURBOCHARGED GROWTH, BUT ARE NOW JOINING THE LOWER-SPENDING 55-PLUS COHORT
The key development was the arrival of the Boomers in the Wealth Creator 25-54 age group that drives economic growth. Consumer spending is 60% – 70% of GDP in most developed economies. And so both supply and demand began to increase exponentially. In fact, the Boomers actually turbocharged supply and demand.
Breaking with all historical patterns, women stopped having large numbers of children and instead often returned to the workforce after having 1 or 2 children. US fertility rates, for example, fell from 3.3 babies/woman in 1950 to just 2.0/babies/women in 1970 – below replacement level. On average, US women have just 1.9 babies today.
It is hard to imagine today the extraordinary change that this created:
- Until the 1970s, most women would routinely lose their jobs on getting married
- As Wikipedia notes, this was “normal” in Western countries from the 19th century till the 1970s
- But since 1950, life expectancy has increased by around 10 years to average over 75 years today
- In turn, this meant that women no longer needed to stay at home having babies.
- Instead, they fought for, and began to gain Equal Pay and Equal Opportunity at work
This turbocharged the economy by creating the phenomenon of the two-income family for the first time in history.
But today, the average G7 Boomer (born between 1946 – 1970) is now 60 years old, as the 3rd chart shows. Since 2001, the oldest Boomers have been leaving the Wealth Creator generation:
- In 2000, there were 65m US households headed by someone in the Wealth Creator 25-54 cohort, who spent an average of $62k ($2017). There were only 36m households headed by someone in the lower-spending 55-plus cohort, who spent an average of $45k
- In 2017, low fertility rates meant there were only 66m Wealth Creator households spending $64k each. But increasing life expectancy meant the number in the 55-plus cohort had risen by 55%. However, their average spend had only risen to $51k – even though many had only just left the Wealth Creators
CONCLUSION – THE CHOICE BETWEEN ‘DEBT JUBILEES’ AND DISORDERLY DEFAULT IS COMING CLOSE
Policymakers ignored the growing “demographic deficit” as growth slowed after 2000. But their stimulus policies were instead essentially trying to achieve the impossible, by “printing babies”. The result has been today’s record levels of global debt, as each new round of stimulus and tax cuts failed to recreate the Boomer-led economic SuperCycle.
As I warned back in January 2016 using the words of the OECD’s William White:
“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.”
That recession is now coming close. There is very little time left to recognise the impact of demographic changes, and to adopt policies that will minimise the risk of disorderly global defaults.
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The US 10-year Treasury bond is the benchmark for global interest rates and stock markets. And for the past 30 years it has been heading steadily downwards as the chart shows:
- US inflation rates finally peaked at 13.6% in 1980 (having been just 1.3% in 1960) as the BabyBoomers began to move en masse into the Wealth Creator 25 – 54 age group
- Instead of simply boosting demand, as during the 1960s-1970s, they began to work and create new supply
- This meant supply/demand began to rebalance and interest rates then peaked at 16% in 1981
By 1983, the average Western Boomer (born between 1946-1970) had arrived in the Wealth Creator cohort, which dominates consumer spending, and the economy really began to hum. There was a final inflation scare in 1984, when US inflation suddenly jumped from 3% to 5%, but after that the trend was downwards all the way.
The Boomers were the largest and wealthiest generation that the world had ever seen. Their move to become Wealth Creators completely transformed the inflation outlook, as more and more Boomers joined the workforce. And they transformed the economy by moving it into the NICE era of Non-Inflationary Constant Expansion.
Central bankers took credit for this move, claiming it was due to monetary policy. But in reality, people are the key element in an economy, not monetary policy. You can’t have an economy without people. And sadly, the idea that the US Fed Chairman Alan Greenspan had somehow become a Maestro, blinded everyone to 2 key issues for the future:
- Life expectancy was rising rapidly, meaning that the Boomers would not normally die just after retirement. Instead, they would likely live for another 15 – 20 years after reaching age 65
- From 1970, fertility rates had fallen below replacement level (2.1 babies/woman) across the Western world
This combination of a rise in life expectancy and a collapse in fertility rates was creating a timebomb for the economy.
THE RISE IN LIFE EXPECTANCY AND COLLAPSE OF FERTILITY RATES CREATED AN ECONOMIC TIMEBOMB
Western economies are based on consumer spending. And spending declines once people reach the age of 55 – they already own most of what they need, and their incomes decline as they approach retirement, as the second chart shows:
- There were 65m US Wealth Creator households in 2000, who spent an average of $62k ($2017)
- There were only 36m in the 55+ cohort, who spent just $45k each
- In 2017, there were 66m Wealth Creators (almost the same as in 2000) who spent $64k each
- But there were now 56m in the 55+ cohort, who spent just $51k each
The rise in 55+ spending was also only temporary, as large numbers of Boomers have just reached 55+ and have not yet retired. Spending by those aged 74+ was down by nearly 50% versus the peak spending 45-54 age group.
BELIEF IN MONETARISM LED TO THE DOTCOM AND SUBPRIME DISASTERS
The dot-com crash in 2000 should have been a wake-up call for the failure of monetarism. It also, after all, marked the moment when the oldest Boomers began to join the 55+ cohort. But instead, policymakers thought monetarism could solve “the problem” and cut interest rates to boost the housing market – causing the subprime crash in 2008.
One might have thought – as we wrote in Boom, Gloom and the New Normal in 2011 – that this disaster would have destroyed the monetarism myth. But no. Abandoning monetarism would have led to a difficult conversation with voters about the need for everyone to retrain in their 50s, and prepare to take on new, and less physically demanding, roles.
Instead, policymakers tried to replace lost BabyBoomer demand by printing vast amounts of free money via the Quantitative Easing and Zero Interest Rate Policies. Their aim was to avoid deflation, as inflation had fallen to just 0.6% in 2010 – although why this was a “bad thing” was never explained. But in reality, they were running uphill, and the pace of the climb was becoming more vertical, as the average Western Boomer joined the 55+ cohort in 2013.
Of course, flooding the market with cheap money boosted asset prices, as they intended. Stock markets and house prices soared for a second time. But it also created a major new risk. More and more investors began to panic as they hunted through the markets, trying to obtain a decent “return on capital”. They assumed central banks would never let markets fall, and so gave up worrying about the risk of making a dud investment.
INTEREST RATES ARE NOW HEADED HIGHER AS PEOPLE WORRY ABOUT RETURN OF CAPITAL
The end of the Bitcoin bubble has highlighted the fact that that risk and reward are normally related. Most investments that offer potentially high rewards are also high risk – a lot has to go right, for them to make the possible return. This process of price discovery – the balance of risk and reward – is the key role of markets.
Left to themselves, markets will price risk properly. But they have been swamped for the past decade by central bank liquidity and their crucial role has been temporarily destroyed. Now, the fact that the US 10-year bond has broken out of its 30-year downtrend tells us that markets they are finally starting to regain their role.
How high will interest rates now go? We cannot yet know, and we can also be sure they will not move in a straight line as central banks will continue to intervene. But as more and more investments, like Bitcoin, prove to be duds, so more and more investors will start to worry about return of capital when they invest.
4% therefore looks like the next level for rates, as we are now trading within the blue bars on the chart. It may not take very long for this level to be reached, given the fact that the world now has a record $233tn of debt – 3x the size of the global economy. After that, we shall have to wait and see.
I strongly believe that forecasts should be monitored, which is why I always review the previous Annual Budget forecast before issuing the next Outlook, and always publish the complete list of Annual Budget Outlooks.
I now plan to begin monitoring my blog forecasts, using the percentage mechanism highlighted in Philip Tetlock’s masterly “Superforecasting” book. The first forecasts relate to last week’s post on US polyethylene exports and today’s forecast for the US 10-year Treasury bond. I will change confidence levels as and when circumstances change.
The post US Treasury benchmark yield heads to 4% as 30-year downtrend ends appeared first on Chemicals & The Economy.
Nearly 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.
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.
The Financial Times has kindly printed my letter below
, welcoming the Fed’s decision to address the impact of demographics, but arguing that it needs to focus on demand issues, given the impact of today’s ageing populations.
Sir, It is good to see the US Federal Reserve is finally beginning to address the impact of demographics on the economy, after years of denying its relevance. But as John Authers confirms in his excellent analysis of the Fed’s new research paper (“The effects of ageing”, The Big Read, October 26), its continued focus on supply-side issues means it is looking down the wrong end of the telescope.
The Fed’s approach might have made sense in the past, when demand was on a growth trajectory as the baby boomers joined the 25-54 cohort, which drives wealth creation. But today’s problem is growing overcapacity, not lack of supply, given that the ageing baby boomers already own most of what they need, while their incomes are declining as they enter retirement.
The problem is that the Fed’s economic models were developed at a time when the population effectively contained only two main segments — the under-25s and the 25-54 cohort. From a policy perspective, the number of over-55s was too small to be of interest. But this is no longer true, as increasing life expectancy means the baby boomers can now hope to live for another 20 years after reaching retirement age.
Equally important is that since 1970, fertility rates have been below the replacement level of 2.1 babies per woman in the developed world. Thus the relative size of the wealth creator cohort has been reducing for the past 45 years, while the numbers in the 55-plus cohort have been increasing. The result is that the ageing baby boomers are now nearly a third of the developed world’s population.
Policymakers therefore need to urgently refocus on the demand-side implications of ageing, if they want to craft suitable policies for this New Normal world.
Companies and investors often say “we don’t need to think about demographics – its too far in the future to matter”. This might have been true 20 years ago, but not today. As European chlorine industry demand confirms, the truth is that “history catches up with us”.
The reason is simple. Europe stopped having enough babies to replace its population with the end of the BabyBoom in 1970. Today, women have just 1.7 babies each, compared to the 2.7 babies/woman seen in the early 1960′s. Replacement rate would be 2.1 babies. And this, of course, matters enormously for demand:
- Consumption is around 2/3rds of GDP in developed economies
- And it is those in the ‘wealth creator’ 25 – 54 age group who drive spending and economic growth
Of course, the overall European population is still expanding today. But this is mainly because of the dramatic increase in life expectancy. This means someone aged 65 can now expect to live for 20 years in retirement. And older people contribute much less to GDP growth
- They already own most of what they need
- And their incomes decline as they enter retirement.
The chart above of chlorine production and operating rates highlights the impact of these two developments for demand. The reason is that chlorine, and its co-product caustic soda, are essential products in modern society. Based on salt, they are used in applications ranging from construction through to water treatment, detergents and pharmaceuticals. Based on Eurochlor data it shows:
- Annual chlorine production on the left, and operating rates (%) on the right since 2007, with Q1 2015 annualised
- In 2007, production was 10.7MT (black line) and operating rates averaged 84.5% (red)
- They have never been close to this level since, with 2010 the peak year at 10MT and 79% operating rates
The key is the decline in construction and therefore PVC demand.
As the chart on the left shows, based on Eurostat data, this peaked in 2007 and has never recovered. Part of the reason is the end of the speculative rush to build second homes in countries such as Spain. Vast numbers of these apartments have never been occupied, and the local population in most holiday resorts is not big enough to fill the gap.
The other reason, of course, is the ageing population and lack of babies.
Young adults normally provide major support for construction markets. They have to set up home for the first time, and then they often need to have bigger homes when they start a family. Equally, employers have to build offices and factories where they can work.
But older people already have somewhere to live, and are instead leaving work to retire. They might in the past have thought about buying holiday homes, but today they are increasingly concerned about having sufficient savings for their retirement.
The relative lack of young people since 1970 has enormous consequences for future economic growth. As the head of Copenhagen’s University Hospital’s fertility clinic warned last year:
“We have for many years addressed the very important issues of how to avoid becoming pregnant, how to avoid sexual diseases, how kids have a right to their own bodies, but we totally forgot to tell them we cannot have children forever.”
These demographic changes mean that Europe’s adult population is increasingly being dominated by people in the 55+ generation for the first time in history. Even in 1950, life expectancy at birth was roughly equal to retirement age at 65 years.
The result, as European chlorine demand confirms, is that the European economy has gone ex-growth. And as the European Central Bank is just beginning to realise, you can print money, but you can’t print babies.