Most investors operate on long time horizons. Whether the Nikkei or the FTSE100 will be up or down a bit by spring, or whether the dollar will finish the year up or down against the euro, no one really has any idea. The best anyone can do is figure out what the long-term trends are, and make investment decisions accordingly.
Over a 20- or 30-year view, most of us probably think we have a fair idea of where the world economy is going. China will gain global dominance, closely followed by India, Brazil and Russia. Japan will continue its long slide into irrelevance. Europe is just about finished, although the German export machine will keep powering ahead. America is in irretrievable long-term decline, sunk by debts, deficits, and imperial over-reach. Yet the latest demographic research suggests that script is just about completely wrong.
In the long-run, economics is basically demographics, with supply and demand charts thrown into the mix. A country’s GDP is determined by the number of workers, multiplied by their output. Output per worker varies depending on productivity growth. The number of workers varies too, partly depending on the numbers of people in work. Welfare systems can deter low-paid workers from looking for jobs and social trends also affect the statistics (the number of women working has affected employment rates in all developed countries).
But the number of workers depends most crucially on birth rates. Once a population goes into decline, it’s hard for an economy to grow. If the population is growing, it’s hard for the economy not to. So how does that influence big global economic trends?
Forget all that stuff about Japan’s lost decade. It’s nonsense, pushed by Keynesian economists to justify printing lots of money. As Daniel Gros, director of the Centre for European Policy Studies, has pointed out, Japan “never lost a decade”. When you divide GDP by the number of people of working age (defined as everyone between 20 and 60), Japan did better in the last decade than America, and most European countries. That seems to chime with the evidence we can see all around us. If Japan is doing so badly, how come the roads are full of Toyotas and our houses full of Nintendo Wiis and Sony TVs? If Japanese demand is so weak, why is unemployment only 5% – half the rate it stands at in America and the eurozone?
In fact, Japan did as well as a wealthy, mature economy could be expected to do. It would probably have done better if the Bank of Japan had listened less to academic Keynesians, and printed less money. Even so, the message is clear. Japan remains one of the most innovative, successful capitalist economies in the world – it’s just not going to show up in the GDP numbers because its population is falling.
Next, re-think China’s rise to global dominance. True, the country is rapidly industrialising. It’s a big place, and it is going to be a big player in the global economy. But how big? Right now, China is in a demographic ‘sweet spot’.
The one-child policy means there aren’t many children. And past population growth means there aren’t many old people either. So in this decade, China has an exceptionally high percentage of its population of working age. That is terrific for growth right now, but bad for the long term. By 2030, China will have a greater percentage of pensioners to look after than America. That’s going to be a big drag on economic growth. And there won’t be much anyone can do about it.
America, by contrast, will be in much better shape. True, America has been running big budget and trade deficits, and its banking system is in a terrible mess. But those are all short-term problems. The over-60s currently account for just 18% of the American population. That will only rise to 25% by 2050. The US has one of the highest birth rates in the developed world (14 births per 1,000 people annually, compared with 12 in Britain and eight in Germany). And it remains open to immigrants – at least compared to other rich countries.
There will still be lots of bright, hard-working Americans joining the labour force every year for the foreseeable future, and they won’t be paying a fortune in taxes to support an army of pensioners. It’s hard to see how that can be bad for growth.
Lastly, re-think what you know about Europe. Germany has catastrophic demographics, and the country is increasingly suspicious of immigrants. A kink in the birth rates means the working-age population has been stable since 2005 and will stay that way until 2015. Then it falls of a cliff. You can’t keep an export machine going when there aren’t any workers. France and Britain, by contrast, are set to dominate Europe – they are the only two major countries with stable or growing populations.
What should investors make of all this? It’s simple: set up a portfolio of index-tracking funds following the Nikkei and the S&P 500, with a side position in the FTSE 100 and France’s CAC 40. Then come back and check your investments in 2030 – you’ll be pleasantly surprised.
• This article was originally published in MoneyWeek magazine issue number 520 on 14 January 2011, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, sign up for a three-week free trial now
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