Here’s a simple quiz for you.
There are two countries — let’s name them ‘Have’ and ‘Have Not’. Each has a population of one million people.
In the land of Have there’s a standard societal pyramid — large base of children and productive under 65 year-olds supporting a much smaller apex of older (economically unproductive) citizens. The land of Have has an average income of $65,000.
In the land of Have Nots, the pyramid is becoming inverted — a declining base supports a growing apex of older (economically unproductive) citizens. The land of Have Nots has an average income closer to $40,000.
Which economy would you expect to be the better performer? It’s not a trick question. Of course, the land of Have is in a much stronger position to achieve economic growth.
At best, the Have Nots will likely stagnate or, more probably, go backwards.
Let me declare upfront I have nothing against older people…I am fast approaching that realm myself. However, from an economic point of view, older people contribute far less to the productivity of an economy than those who are working.
By way of example, Japan is a nation with a declining population, a growing number of older people, and a truckload of debt. These factors are all playing their part in Japan’s economic woes. Woes that no amount of money printing, market fixing or lowering of interest rates have been able to fix.
The following graph on world population growth — births minus deaths — provides another clue on why the past is unlikely to be repeated in the coming years.
The Mother of All H & S Patterns covers the period 1973 to 2012…40 years. (By the way H & S is technical speak for Head & Shoulders.)
Population growth invariably leads to economic growth. More people require more stuff — food, clothing, shelter, transport, electricity, financial services, and on it goes.
However, the right hand shoulder is slumping away. Projected growth is in decline. Does this then translate into a decline in economic growth? Less demand for stuff?
Which feeds into the narrative of why markets must revert to the mean. Underlying corporate earnings are likely to be adversely affected by a softening in demand.
If we look at the population growth numbers with an overlay of how they are constructed — over 45s and under 45s — it only strengthens the argument that demand is going to be softer in the coming years and decades.
The majority of future growth will come from boomers staying around for much longer than the previous generation.
The population growth for under-45s has collapsed.
Boomer readers can identify on this graph exactly when it was they crossed over from the under to over 45 section…personally my transition was in 2004.
Lower birth rates and a slowing death rate is not the way to build the traditional population pyramid for a productive economy.
Demographic trends are not something that can be turned on and off with a switch. These numbers are baked into the cake for decades to come. This pattern is not going to change anytime soon.
With a steadily increasing percentage of retirees to workers, governments are going to be forced to make decisions…some more difficult than others.
Reduce benefits, such as welfare and healthcare. Increase taxes, both income and consumption taxes. And increase the immigration intake.
And on that last point, we look at where the declining population growth is coming from.
The big driver over the past four decades was in the red zone: the BRICs — Brazil, Russia, India, and China.
Population growth from these countries is in steady decline over the next 30 years.
The same declining trajectory is predicted for the wealthier OECD countries.
The majority of future global population growth is forecast to be from the poorest nations on Earth.
Perhaps one or more of these will be another China. However, among this group I cannot think of another nation of one billion that’s awakening from an economic slumber.
Will governments — in search of a population base broad enough to support an expanding apex — increase their immigration intake?
Even if they do, it’s not as easy as it sounds. Quantity is not quality.
Bringing in more people to join the welfare queue only adds to the problems they’re trying to solve.
The current anti-refugee and immigration sentiment that’s influencing British, European and US polls indicates that, even if there’s a need to shore up the population base, the political will to do so may or may not be there.
In the foreseeable future — especially if economic conditions worsen and unemployment rises — it’s unlikely any government is going to run on a platform of ‘more immigration’. Therefore, the shrinking productive base problem, and the impact this will have on economic growth, is being pushed out to sometime in the future. And, as is usual with these difficult decisions, it’ll be foisted upon the political class only when it’s staring them in the face.
Based on these graphs, it’s fair to say future population growth is not going to be the same as past population growth.
So what do we have?
The past 40 years has been a truly extraordinary period of time.
There’s been nothing like it in terms of economic, financial, technological and healthcare progress.
We have lived through a purple patch in history. We should recognise it for what it is…a period that is unlikely to ever be repeated in our lifetimes.
Demographics have played a large part in this truly historic episode.
But nothing remains constant.
Demographics are changing. Boomer youthfulness is but a memory. We have a society migrating towards a mix of more elderly and less youth.
There is a massive trend change coming. The $64,000 question is ‘when?’
Oh how I wish I had the answer to that one.
The one thing I am almost certain about is that the trend change is going to create enormous upheaval in peoples’ lives.
For Money Morning
Editorial note: The above article is an edited extract from Vern’s premium advisory service, The Gowdie Letter.