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Bigger risks than Covid: The Death of Growth

 In Newsletter

Newsletter 154

This week’s newsletter is co-authored by Tony Nash and Dr Clint Laurent

 

Although mid-summer volatility is a tempting topic, we’ve taken a break from this week’s market drama to be a bit more thoughtful about longer term trends. Covid has drawn our attention for the last 18 months, but it is temporary. Believe it or not, there are larger risks and opportunities just over the horizon.

 

Our recent Quick Hit discussion with Clint Laurent of Global Demographics uncovered several compelling developments. You can find Part 1 here and Part 2 here.

 

China’s slowdown will affect the world

 

We all know that the pace of China’s growth is unsustainable. It’s very difficult to have 6-8% economic growth without growth of the population, education, investment, productivity, rural-urban migration, etc. Sadly, we also know that China’s One Child Policy has had some downside

 

Even with the recent announcement of the Three Child Policy, China’s population is in unstoppable decline. Why is China hoarding resources, pushing for pre-eminence of the Chinese Yuan, aggressively pursuing diplomatic dominance and so on? Because China will soon be resource constrained owing to a declining population and much slower economic growth.

 

How do we know this? In short, the One Child Policy left us with few too women of child-bearing age to grow the population. This isn’t a distant problem, either. Births peaked in 2017 and population will peak in 2024. 

 

China's declining population 2005 to 2039

 

This does not mean China will be impoverished soon and it does not mean China’s streets will be desolate. It simply means slower growth. Without a global reserve currency, it will be incredibly difficult for China to carry a current account deficit. Trade-offs must be made. For example, as China gets older, cheap labor is harder to find. The trade-offs that China faces will be felt around the world as the growth rate of China’s consumption slows.

 

Find much more in Part 1 of “The Death of Growth” here.

 

Half a billion will be without jobs globally

 

For decades, the world economy has maintained a fortunate equilibrium between the growth of consumption and the growth in number of persons seeking work. The growth in consumption expenditure has been at a rate that has absorbed both the increasing number of persons seeking work and the improving productivity per worker. 

However, starting around 2024 the growth in number of persons seeking work outpaces the growth in number of persons needed to produce what is consumed. This is a function of two factors:

 

  1. The now rapid increase in the number of working age persons in countries with younger populations (South America, South Asia, Middle East and Africa). This is often called the Demographic Dividend. This growth in number of persons of working age is inevitable as these people are already alive today and enter working age (15 years plus) from now on.
  2. The number of consumers in the (older and more affluent) countries that account for 78% of consumption in 2020 (and onward) is no longer growing in number and this mutes future demand growth. This also cannot change in the short term.

 

Assuming productivity per employed worker continues to grow at the average rate of 2% per annum then by 2040 there will be a shortfall of work opportunities of 501 million persons. What will these people do?

 

Person seeking employment VS persons employed

 

We expect to see severe migration problems ahead. Europe is the focal point because it is nearest to many of these young, poor countries. Many of the migrants will come from Africa. For example, half the population of Mali & Niger is under 14. And Nigeria has 45 million school age children. In 25 years, that will be 90 million school age children. These young adults will need work, and those who can are likely to seek it in Europe.

 

Find much more in Part 2 of “The Death of Growth” here.

 

The early 21st century has been a fortunate period. Until now, consumption growth in older affluent countries – and China – has allowed for jobs growth globally. As old, affluent populations (including China, Japan and Korea) level out, job growth slows. Over the next 10 years, worrying economic crises are likely to emerge from global population, education, and income disparities.

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