Global demographic rebalancing could be the chief focus of the decade

It is the start of a new year, and many other blogs are lining up their forecasts for the new year. Since we are embarking on a new decade, I would like to make my forecast for the following decade (In many ways, it is much easier to project what is longer-term than what is just around the corner, because you do not have to be as accurate in timing or detail).

Let me start off by describing a framework conjured by Italian economist Franco Modigliani, termed as the life cycle savings theory (hat tip Edward Hugh, who has been basing much of his analyses and projections on the life cycle theory). The theory divides people into various age groups:

0 – 20 yrs – childhood. Life characterized by pure consumption, dependency to elders.
20 -50 yrs – the bulk working years. Characterized by high investments and high spending. This is the time when people start saving, buy a home, start a family, educate young children, buy new things for a growing family.
50 – 65 yrs – the pre-retirement years. Characterized by much higher savings and liquid investment. No longer supporting or educating children, no more mortgages to pay, and people have acquired most stuff they should ever want. They arestarting to plan and save for retirement yrs.
65 yrs onwards – retirement years. No longer earning. Using up existing savings to fund for retirement expenses.

Countries that have a big bulk of its population in the 0-20 yrs and the 20-50 yrs have high growth economies. Most people are spending for housing, education, acquiring things, buying a car, etc. Businesses are expanding, both as a result, and in anticipation, of this. The US for the most part of most part of its history is in this group.

Countries that have a big bulk of its population in the 50-65 years have a high savings rate. The economy is no longer growing quickly, but there is a high surplus savings that people are looking for assets to put into. The US is entering this stage, as well as Canada, Australia, Germany, Sweden.

Countries that have a big bulk of population in the 65 yrs upwards will be in a perennial deflation. People are no longer investing to start new businesses, there is a shortage of productive workers for those few businesses left, retirees living on fixed pensions are happy that deflation is causing consumer prices to go down even though it is also destroying the savings of those who still have high savings. Japan is entering this stage.

The reason greying countries like Japan, Germany and Sweden are relying on large exports to boost their GDP is that their domestic consumption is no longer high enough, given that most of their elderly population is in the savings stage of life, not investing or massive spending stage. Without exports, their economies will stagnate. Hence, the current economic environment is going to be dangerous for them unless the government does drastic things to artificially prop up the economy. The US is now doing what Japan has been doing since the 1990s. It is acting as the spender of last resort and resorting to yearly deficits. In the long run, this will result in high government debt.

Here in Canada, many Canadians are already getting into cash and staying in cash. These could largely be the people who are nearing retirement, and do not want, and don’t have the time frame, to get into speculative investments. They want to be liquid so that they will have money when they need it in retirement.

Japan, which is entering the last stage, is now trying to keep its mostly elderly population from becoming impoverished by supporting a strong yen. The strong yen contributes to deflation locally, and it makes goods cheaper for people on pensions. The government has also been supporting their pensions, despite more than a decade of economic stagnation, by constant deficits. The government has previously been able to finance its deficits by being a net exporter, but not anymore.

So how will the world look like as we get further along in the next decade? All developed nations, who mostly have older populations, will experience much slower growth, some like Japan, will decline even further. The big growth in the world economy will have to come from the emerging economies. They will be the ones who can support growing businesses, and this will attract investments from countries that are now experiencing high surplus savings (provided that these emerging economies are able to develop a thriving consumer class capable of replicating that of the developed countries.)

Australia and Canada may have largely avoided stagnation because of the constant arrival of new immigrants. These people are, on the whole, almost identical substitutes for people in the 20-50 year age group, who are characterized by high investments and high spending, who are still buying homes, starting families, educating young children, buying new things for growing families.

Germany and Japan, which have more homogeneous societies and do not encourage immigration, have relied more on surplus exports, and in the case of Japan, has been having a stagnant economy for the last 15 years. Younger people in Japan are mostly working in temp jobs, as most business can no longer afford regular employees in this economy. They are now caught in a vicious spiral of a declining economy, which leads to conditions that decline the economy further.

Businesses expect to thrive best in economies with young and growing populations, who have enough growing incomes to support more growing businesses . Emerging economies, as I have mentioned, could fit this bill, but their domestic consumer economy will need a strong jumpstart if they are to realize their potential. A potent growth strategy for them will be to focus energies on improving infrastructure, so that they can attract the demographic who are pure consumers, and who may be looking for low cost substitutes to retirement in a developed country.