If you are in or around your mid-40s and have noticed that your parents spend rather less money than you do, it is possible that you have more of an insight into the growth patterns of the UK than all the City’s economists put together.
It is increasingly clear that trend GDP growth rates are strongly influenced by how many people of any particular age live in any one country. In the UK, for example, we tend to think that constant growth at 2-4% is normal simply because, for as long as we can remember, any dip has been followed by quick recovery.
But look at our demographic profile and you get a glimpse of a very different future. According to figures from Paul Hodges at the consultancy International eChem, births in the UK rose by 15% between 1946 and 1970 compared with the previous five years. This gave us an extra three million babies. That was nice for families, but it was also brilliant for the economy. Those babies grew up to create what Hodges calls the “growth supercycle” of 1982 to 2007: the period in which they reached their peak spending age range (46 is the average top spending age) and the one in which the credit markets developed to make sure they had the cash to make the most of it.
In the early part of peak spending – say 25 to 39 – people tend to work hard and productively and to invest in housing. As they hit 40 they become slightly less productive and move on to investing any surplus in bonds and equities. At 65 they stop work, cut consumption and downsize both their housing and stocks. It makes sense that when we have large groups of the young we should see rises in asset prices and GDP – this makes particular sense if you think of GDP as being the number of workers times the productivity of those workers.
The problem now is that, despite my generation of working mothers doing our best to keep things going, we no longer have large groups of the young. Births between 1971 and 2000 were 17% lower. The result is that over-55s are now the only growth cohort in the UK. That might be good for travel agents – recreation is the only area of major household spending that rises post 50 – but it isn’t going to help us with the GDP equation.
Worse, our ‘boomers’ are uncomfortably aware that the savings they have entrusted to the state and financial industry might not have been husbanded carefully enough to provide the retirement they want. So they might even spend less than the historical average for their group.
Anyone who thinks demographics is irrelevant nonsense might glance to Japan. It experienced a baby boom slightly earlier than we did, says Hodges. Japan’s Boomers hit the peak wealth creating age between 1977 and 1994. The Nikkei peaked in 1989 with government bond yields at 8% and growth at 4%. It has been around 1% since – regardless of the government’s stimulus efforts. The implications, said the governor of the Bank of Japan earlier this year, are “profound”. There will be “differences in timing and magnitude” but eventually all developed countries should expect “a decline in growth potential, a deterioration of the fiscal balance and a fall in housing prices”. Hmm. Look around you. See any of that?
The end effect of having an ageing population will be argued about for years. But a note from Research Affiliates puts the cost of ours at about 1.4% of GDP a year. And that, of course, is not the only headwind we face. There is our debt, the costs of which add up to another 0.8% of GDP every year and, as we try and cut it, the removal of the “phoney GDP” deficit that spending has long created. Research Affiliates put this at another 0.8%. Add all that up and the 1% GDP growth the UK appears to be seeing looks like something of a miracle.
So how do you invest into this? It’s tough.
Low growth and high debt make governments erratic – particularly when their electorates don’t like the idea that 1% might be as good as it gets. So markets are likely to continue to be pushed around by tax changes, endless inflation and deflation scares, and the distorting effects of aggressive monetary policy.
The key to success is put well by First State’s Jonathan Asante: the “further you can get your money away from governments the better,” he says. That means buying the dividend-paying multinationals that are able to protect themselves from both inflation (because they have some kind of oligopolist brand and pricing power) and from the problems of any one state (because their intellectual capital is so mobile as to be almost untaxable – look at Starbucks).
I’ve been suggesting you hold these stocks for a while now, and their popularity is beginning to make me nervous – popular stocks are expensive stocks, and expensive stocks don’t stay that way forever. But it is hard to see where else to go at the moment: governments are using very low yields on deposits and bonds to force us into paying more than we would like to chase returns elsewhere. It isn’t a particularly admirable policy. But it does work.
• This article was first published in the Financial Times.