Demographics Will Profoundly Shape Markets & Asset Returns For Decades
Demographics is one of the most underestimated forces in financial markets and together with Net Zero will profoundly shape markets, asset returns and investment opportunities in the decades to come. While the changes may be glacial and the impacts hotly debated, we believe that the economic consequences are profound. Demographics is the hidden force driving underlying interest rate and inflation cycles (think deflation) as well as debt cycles, GDP and house prices. It is a major source of risk hiding in plain sight.
Demographics remains topical – emerging baby bust
Demographics has been making headlines in the last few months. In 2020, France recorded the lowest number of births (735,000) since the end of the Second World War while in Italy, the gap between births (400,000) and deaths (647,000) was the widest since 1918. Meanwhile, in 2020, the US recorded its lowest annual population growth (0.35%) on record, the fewest birth (3.6m) since 1979 and the lowest fertility rate (1.64) since the 1930s, when records began. Note, a fertility rate of 2.1 is needed to sustain a population absent immigration. Similar trends are playing out in China despite the relaxation of the one child policy in 2015. The population recorded its lowest increase over a decade (5.4%) since records began in 1953 while the fertility rate is now estimated by China’s central bank to be below 1.5 (the World Economic Forum puts it even lower at 1.3). Why the declines? Many have been swift to blame the COVID pandemic but the trends were already firmly in place. Key is economics. The increasing cost of housing and education mean children have become too expensive for many to afford. Rapid urbanisation is also to blame.
Key demographic trends – ageing yes but also emerging population decline
There are two key demographic trends which will shape markets and economies for decades to come. As a result of increasing life expectancy and declining birth rates globally, not only are populations ageing but populations and workforces are starting to decline in key western and Asian economies. The eurozone, Eastern Europe and China are all set to follow Japan with rapid ageing and population declines out to 2050. Indeed China’s population may peak now in 2030 (its working population already has). But there are global variations. Higher fertility rates will allow France, the UK and US to age more slowly and their populations to continue to expand over the same 30-year period.
Economic implications are deflationary
We find compelling evidence that the current ageing of the population and eventual population decline will have a strong deflationary effect, keep real interest rates lower for longer, depress real GDP growth rates by c2ppt, put pressure on real house prices, and squeeze government finances. Forty years of demographic tailwinds are giving way to 40 years of demographic headwinds. Japan is the playbook, not the exception.
Are millennials different? We don’t think so
The infamous millennial generation (born between early 1980s and early 2000s) are seen by many as different in terms of their consumption and work choices as well as being more tech savvy, so called digital natives. But are they? Most have the same aspirations as prior generations, that is to get a well paid job, buy a house, raise a family, save for retirement etc. And it is these core aspirations, not their specific behaviours that will define their influence on the economy. After all, did we define our grandparents’ generation as being telephone natives? Neil Howe and William Strauss, in their seminal work ‘The Fourth Turning’, propose the idea of generational cycles which repeat every 80-100 years where each generation is defined in terms of the societal, political and economic climate they grew up in. We find this more compelling than the idea of unique generations.
Robotics is key to addressing demographic change
Forget fiscal policy. Structural reforms are key to addressing the economic implications of demographics. Increasing labour force participation rates and encouraging immigration face challenges leaving innovation and R&D as the line of least resistance. This means automation and robotics will emerge as preferred solutions to ageing and shrinking workforces. And this will extend from manufacturing to primary industries like agriculture and service industries such as eating out and care homes.