I’m refraining from using the title, “It’s the demography, stupid!” or “Demographics are destiny.” They have been used so many times before. But sometimes demographics really do explain so much.
Demographic changes are slow. They are hard to see. They don’t trigger discrete market events or sudden price changes. But their effects can be huge.
Thomas Parker of BlackRock said in an interview last year that there is a lot of rhetoric about how Reaganomics pulled the economy out of the troubled 1970s. But no, he says. More important was that the massive cohort of baby boomers started moving through the economy. They started working, acquired skills, and gave the economy a huge productivity boost. It was good demographic luck. Also helpful was that they created an enormous wave of home buying.
Now that the baby boomers are aging, he says, their lower consumption patterns help to explain today’s decline in retail. Yes, e-commerce is hurting traditional retail. But so is the biggest cohort in our population moving into an age of lower consumption.
Whether you agree or not, there’s no doubt that the world entered an amazing demographic sweet spot in the 1970s that now is starting to reverse.
From 1970 on, the number of young people entering the work force surged, birth rates fell, and so did dependency ratios – that’s the number of the very young and very old who don’t work versus the number of working age adults.
The world dependency ratio fell from 0.75 in 1975 to 0.5 in 2014, and when that happens, there can be enormous economic dividends. Savings rates go up because workers save more than retirees. Interest rates go down, pools of capital become readily available, and benign growth can flourish.
Gavyn Davies wrote in the Financial Times last year (in an article called, “It’s the Demography, Stupid!”) that there’s growing consensus among economists that demographics account for much of the drop in real interest rates since 1980 – perhaps as much as 1 – 1.5 percentage points of the decline.
And while the demographic dividend lasted decades, Charles Goodhart of the London School of Economics and Manoj Pradan of Morgan Stanley say it was an extraordinary one-off phenomenon. The bulge in the number of adults reaching working age was something special – and then amplified by the rise of China and the collapse of the Soviet Union. In 1990, there were 685 million working age adults in the developed world. China and Eastern Europe’s entrance into world markets suddenly added another 820 million. Goodhart says that was the biggest ‘positive labor shock’ we’ve ever seen. It encouraged savings, lowered interest rates, and kept wages and product prices around the globe subdued.
That gives us much to think about, now that we know population trends are reversing. Baby boomers are retiring and drawing down their savings. Populations in China and other Asian countries are aging rapidly. 2017 is likely to be the year that the global dependency ratio starts to rise. So what does it mean we have to look forward to? Quite possibly, the end of low interest rates and a return to an inflationary world.
