Anyone who had listened to what the Bank for International
Settlements was saying since 2005 would have been well prepared for the shocks
that began towards the end of 2007 and then blew up in 2008. They issued a new
warning in their September 2011 report, The Real Effects of Debt. We should heed
this warning. They conclude, “Our examination of debt and economic activity in
industrial countries leads us to conclude that there is a clear linkage: high
debt is bad for growth. When public debt is in a range of 85% of GDP, further
increases in debt may begin to have a significant impact on growth (in 1st qtr
2010 USA’s debt: GDP ratio was 117%)… A clear implication of these results is
that debt problems facing advanced economies are even worse than we thought.
Given the benefits that governments have promised to their populations, ageing
will sharply raise public debt to much higher levels in the next few decades. At
the same time, ageing may reduce future growth and may raise interest rates,
further undermining debt sustainability.
“So, as public debt rises and populations age, growth will
fall. As growth falls, debt rises even more, reinforcing the downward impact on
an already low growth rate.”
They conclude, “In the end, the only way out is to increase
saving.” This is part of the process of de-leveraging which is likely to take
until around 2018 to run its course. These years will be characterised by
rolling recessions and deflating asset prices interspaced by short periods of
recovery.
The second dynamic which will help shape the world economy
will be the demographic changes with so many countries’ population age profiles
changing for the worse and far outnumbering those that will continue to have
positive demographic profiles, India, Indonesia and Brazil to name just three.
Demographic change is not an abstract development; it will
have serious consequences for future growth. The OECD, for instance, estimates
that the impact of aging on GDP growth rates will be a decrease of growth in
Europe to 0.5% a year, in Japan to 0.6% a year and in the USA to 1.5% a year in
the period 2025-2050.
Demographic changes will impact household wealth creation. In
their report, The Coming Demographic Deficit: How Aging Populations will Reduce
Global Savings, they wrote: “Aging will cause growth in household financial
wealth to slow by more than two-thirds across countries we studied (USA, Japan,
and W Europe), from 4.5% historically to 1.2% going forward. The slowing growth
will cause the level of household financial wealth in 2024 to fall some 36% or
by $31 trillion, below what it would have been had the higher historical growth
rates persisted.”
For Europe, the demographic profile is worrisome. According
to data by Dr Clint Laurent and his team at Global Demographics, the number of
65+ aged group rises from around 19.6% of the population in 2011 to 29.1% in
2031 with the dependency ratio standing at just 2% by then.
A surprising development is that the demographic profile of
the USA is so much better than that of China. Once the USA puts its financial
house in better order, which it will if not willingly, its growth expectations
will be better than China’s.
For China, based on simple fundamentals, growth has peaked.
The years of circa 10% growth are over because such growth is unsustainable and
brings in its wake a package of problems. “One approach to forecasting total
real GDP of a country is to combine the projected trend in the number of persons
employed with the projected trend in the gross productivity per worker,” writes
Dr Laurent. He calculates that the trends in the education index of the country
should give an expected productivity growth of 7.8% a year to 2016 and 5.8% a
year to 2021.
This slowdown will have a huge impact on China’s future
requirements of imported metals like copper. This trend is likely to be
magnified also by US and other foreign companies vacating China and returning to
their home bases - in the USA once the political system rolls back much of the
red tape, health care costs and tax issues, etc. There is a fundamental reason
for companies to return home: it is that multinationals want their supplier
chains adjacent to the market, not on the other side of the world.
Thus, demographics and debt will be huge constraints on world
growth. As I said at the start of this article, “It’s a mad, mad, mad, mad
world” where there is more individual selfishness and greed rather than the
collective good. Until this changes we will have to wait along time for the
world to get it right.
|
The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the
above article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of reading the
above article. For more information please contact Graham Macdonald on
[email protected] |
