Merryn's Blog

Do demographics really condemn us to a bleak future?

Many commenters have predicted a bleak future for the West based on ageing populations and falling asset prices. But the future might not be quite as grim as a lot of forecasters think, says Merryn Somerset Webb.

Do demographics drive markets? George Magnus of UBS, who I interviewed last week, isn't convinced.

He accepts that the "halcyon era of sustained equity and real estate price appreciation from the 1980s until the financial crisis" happened just as the baby boomers of the 1960s entered the work force. Clearly this brought women, and well educated women at that, into the workforce and meant the quantity and the quality of labour rose at the same time.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

So consumption rose and savings rose too. Those savings went into equities in one way or another (via pensions and so on). They also went into property (particularly in the US and the UK).

He isn't so sure of the rest. According to the next part of the story, this "demographic dividend" was the main reason perhaps the only reason why the prices of all these assets rose.

Advertisement
Advertisement - Article continues below

The problem now is that this process has run its course. For the last 30 years or so, falling fertility has reduced child dependency, yet, with the size of the working population rising, we haven't had to worry too much about the ratio of dependent old people either.

Today, low fertility rates mean there isn't a ready supply of new workers, and the baby boomers themselves are on the verge of being old demanding care costs and endless time from their children.

As far as the demographic doomers are concerned, this means that we can just turn our charts upside down. Savings will fall at the same time as the number of people of first-time-buyer age falls: "the number of 20-44 year-olds, deemed to be the prime first-time home buyer cohort, will fall by 10-20% in the next two to three decades in most advanced nations, but by 30% in Spain and China, and by a whopping 40% in South Korea."

The result? Equity prices will fall. And so will property prices. Fast.

It sounds like a good story, I say to Magnus. What's wrong with it? The main thing, he says, is that "the whole aging thing is unique in human history" so we just don't know how it will pan out.

It might make sense to say that returns on equity will be lower than they have been. But to suggest that "the entire asset appreciation of the last 30 years" is down to demographics? Here he explains why that is "patently absurd", given that it totally ignores the "effects of financial deregulation and innovation and a virulent expansion of credit."

Advertisement
Advertisement - Article continues below

And what of "macroeconomic management, profits, innovation, governance and financial stability"?

It is also the case that "capitalism rewards scarcity," so we can expect, in the West at least, to see labour beginning to claw back some of the rewards that have accrued to management and equity over the last decade. Some may think that a bad thing. I am pretty certain it isnot.

Either way, the point is that it isn't a given that aging populations make for falling asset markets. And even it turns out that they do, the effect won't be seen for a while. "Demographics are slow moving and relatively predictable, and asset markets are sensitive to an array of economic and financial developments, most notably the credit cycle."

It is also worth noting that forecasting markets based on demographics is only as good as the forecasting of the demographics. Which isn't generally very good.

Every year, Japan's National Institute of Population and Social Security Research (NIPSSR) puts out a forecast for Japan's future population. They usually get it wrong. In 2006, their medium forecast for the Japanese population was 127.18 million. Their most optimistic forecast (of nine) was 127.64 million. The actual number in 2010 was 128.06 million.

Advertisement
Advertisement - Article continues below

The difference, says Jonathan Allum of Mizuho in the Blah, comes down to fertility. 2005, when fertility in Japan was 1.26, did not mark, as everyone thought it did, just another point on a downward path. It was the bottom. The number is now 1.39.

The world's many Malthusians have, as Allum says, long "been confounded" by the fact that fertility falls as wealth increases. However this inverse correlation does not last forever.

Here is Matt Ridley on the subject in his 2010 book The Rational Optimist: "The latest research uncovers a second demographic transition in which the very richest countries see a slight increase in their birth rate once they pass a certain level of prosperity. The United States, for example, saw its birth rate bottom out at 1.74 children per woman in about 1976; since then it has risen to 2.05. Birth rates have risen in eighteen of the twenty-four countries that have a Human Development Index greater than 0.94."

At the time, Ridley referred to Japan and Korea as "puzzling exceptions" to this rule. They are not. Both have, against all expectations, seen rises in their fertility rates in the last few years. Another reason perhaps why things in Japan aren't quite as bad as the bears think they are.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516944/why-wall-street-has-got-it-wrong-again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/504252/brace-yourself-the-global-economy-might-be-healthier-than-it-looks
Economy

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019

Most Popular

Visit/economy/uk-economy/600837/rishi-sunak-new-chancellor-spending-splurge
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020
Visit/economy/600814/money-minute-friday-14-february-the-latest-from-rbs-britains-state-owned-bank
Economy

Money Minute Friday 14 February: The latest from RBS, Britain's state-owned bank

Today's Money Minute previews results from RBS – Britain’s state-owned bank – and from pharma giant AstraZeneca.
14 Feb 2020
Visit/economy/600813/money-minute-thursday-13-february-latest-numbers-from-barclays-and-centrica
Economy

Money Minute Thursday 13 February: latest numbers from Barclays and Centrica

Today's Money Minute previews earnings reports from Barclays Bank and Centrica, plus the latest US employment picture
13 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019