Disappearing children, vanishing growth

Falling birth rates mean we have more brothers and sisters than children. This has its economic and investment implications, warns demographics expert Richard Hokenson

“This time it’s different. We have never been here before. This is a world where population is not getting replaced fast enough, with the result we have more brothers and sisters than children.” These were the dramatic statements with which Richard Hokenson, Senior Managing Director, Global Demographics at Evercore ISI, began his address to a group of BusinessLine journalists.

Hokenson, a pioneer in analysis and forecasting of international demographic trends and their associated economic and investment implications, has been pursuing this line of research for many decades. In an interaction laced with juicy anecdotes and witty one-liners, he explained the complex relationship that exists between demographic trends, inflation and global growth.

Excerpts from the address:

Falling inflation

Concern that the earth’s finite resources may not be enough to support its population is not new, it dates back thousands of years. This was expressed by Tertullian, way back in 210 AD, in the Treatise of the Soul. But numbers tell a different tale.

Between 1930 and 2015, the world population has grown from 2 billion to 7 billion. However, the Dow Jones-AIG Commodity Index, adjusted for inflation, has been in a structural decline from 1934 to 2013. That is because global output has improved with time. While there could be spurts, commodity prices will mostly move lower. We are in a dis-inflationary world, inflation will surprise on the downside. That’s why central banks are missing their inflation target. The ultimate resource is not gold, oil, copper or silver — it is human capital.

Shrinking global population

“When I started working on this in 1978, there was population explosion. Now, it’s population implosion,” says Hokenson. Almost 46 per cent of the world lives in countries with falling birth rates. And the existing population is ageing fast. The fastest ageing country in the world is Japan, with China at number two. “But there is a critical difference; Japan became rich before it got old whereas China will age before it gets rich.”

Countries in the developed world with the best demographic profile are the US, Australia, the UK and New Zealand. The US has the highest birth rate in the developed world. With the population also ageing fast, there will be more demand for experiences than goods. The demand for goods is more among the younger set, who want homes, cars, gadgets and so on. But the old have enough of everything, so they want a nice wine, want to go to a concert, on a cruise, etc. My favourite industry is international travel. There will be an explosion of demand here. That’s tailwind. The headwind will be declining demand for manufactured goods. Someone asked me why are we selling fewer cars in Germany, the answer is fewer drivers. If the driving age population is shrinking and you have a saturated number of cars per drivers, you are hostage to what happens to numbers.

Countries in Asia can be divided into those with slowing population growth such as China, Korea, Singapore and Taiwan and those where population continues to grow, resulting in an increasing number of working age population, such as India, Indonesia, Malaysia, Myanmar and the Philippines. Since the global investors are mainly looking for total returns, it is countries with better demographic profiles that will attract more funds.

Country-specific trends

Hokenson thinks that “Africa is the last bastion of growth.” “Not all 33 countries will participate. There are some basket cases, such as Somalia. But directly or indirectly Africa offers opportunities and companies, such as BMW, KFC, etc, will make the most of this.”

Contrary to popular belief, birth rates are falling fast in the Muslim world. The basic driver is education and franchise improvement. Women have opportunities to go to school, they have opportunities to marriage and so on. In Saudi Arabia today, there are more women enrolled in colleges than men, the same is true for Iran. Iran already has a birth rate below replacement rate. Their population is shrinking. “When Boeing 747 flies to Saudi Arabia, it has twice the number of rest rooms in the business class as any other country in Asia because it’s possible that women leave their abayas in these rest rooms and change into Western dresses and they are not going back. The most popular television show in Iran is Oprah. Women are the catalyst of change globally. If you look at the pictures of demonstrators in Cairo, look carefully, more than half are women.”

Hokenson is quite pessimistic about Japan. “There are eight million empty homes in Japan. Its population will peak in 2020, the year in which they host the Olympics. Japan is opposed to migration, so they are cooked.”

Another country with demographic issues is Russia. “In most countries, the current generation is expected to live longer than their parents, but not Russia due to suicide and alcohol,” he explains. China has also hit the wall. Growth rate that was 10 or so is now 5 or 6 per cent. China is not so old now but it is ageing very fast.

The difference between the West and the East is that in the West, the elderly live independently, in the East, they live with their family members. “And now due to very low birth rates, you do not have a family member to live with. Asia as well as India faces the prospects of buildings you never needed before — nursing homes, assisted living, retirement homes…”

Race to zero interest rates

Hokenson believes that we are moving towards zero nominal interest rates. “It’s a position I have held for 24 years,” he says. Yields on US long-term treasuries and nominal GDP have always moved together. Nominal GDP is actual growth and actual inflation and interest rates reflect expected growth and inflation. In shorter time zones there can be deviations, but over long term there will be convergence between the two.

What causes nominal GDP? The answer is labour force. If you do a supply-side decomposition, nominal GDP is caused by population, employment, participation, hours worked and so on. In the period between 1960 and 1980, with population growth, there was higher demand for houses, goods and services, work-force was younger and market couldn’t supply fast enough and there was inflation and interest rates moved higher. The opposite happened post-1980. Positive demand shocks slowed, population became older, more efficient, as supply curve shifted faster than demand curves, the world becomes dis-inflationary.

He signs off by saying that low interest rates is not such a bad thing, it means rising standard of living for us, our children and grandchildren.

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