EDITOR'S LETTERMerryn Somerset Webb
Last weekend I spoke on a panel with three others at the brilliant Battle of Ideas festival at the Barbican. The subject was the British economy post-Brexit. That’s a fascinating topic in itself, of course, but the really satisfactory thing about the debate was the fact that all four of us quickly agreed that when it comes to the UK economy, the coming change to our trading arrangements with the EU is nothing but a sideshow for the UK.
Our financial futures will actually be determined by two much more important things: debt and demographics (see Satyajit Das’s take on this in the cover story). We’ve been talking about this for some years now. But the good news is that it isn’t just MoneyWeek writers and readers who have now noticed just what a difference ageing populations make to countries.
In July the US National Bureau of Economic Research produced a paper analysing the effects of demographics on the US economy. And in the last few weeks both the Federal Reserve of San Francisco and the US Federal Reserve itself have done the same. Their conclusions are all pretty much identical. The more people over 60 there are relative to the rest of the population, the faster GDP growth falls (“we find that a 10% increase in the fraction of the population aged 60+ decreases the growth rate of GDP per capita by 5.5%”). The new normal for GDP growth is therefore significantly lower than it once was (it will “plausibly fall in the range of 1.5% to 1.75%”). The downward pressure on net savings rates and interest rates is not, therefore, as most people seem to think, just a “transitory” effect of the global financial crisis (although this doesn’t exactly help). It is a permanent result of the shift in the age profile of the American population.
That means that the tools the state usually reaches for when it is trying to make a crisis go away aren’t working in the same way as they have in the past. Central banks can’t use low interest rates to stimulate 70-year-old retirees to start businesses and spend money (mostly they’d rather go fishing). And governments can’t hope to create the kind of super-charged GDP growth that will one day make their horrible debt problems go away (those debt problems are in large part down to the fiscal obligations they have to their ageing populations). Endless “stimulus” may not be the answer.
Fixing this is never going to be easy – as poor Philip Hammond will be realising this week as he runs his eyes over our dismal public-sector borrowing numbers (we borrowed £1.2bn more last month than in September 2015). But the first step to finding a way out that doesn’t involve hyperinflation or obvious debt default comes in recognising that the key factor behind slowing GDP growth and rising debt is demographics. The US is clearly beginning to think about all this properly. It’s time we did too.