There is further recognition by major media outlets that perhaps global overpopulation is not the only demographic story in town. Reuters has just published an article on how Japan’s demographic winter and economic malaise are linked and how that country’s example may provide a roadmap for the future of other Western economies.
Over the past 20 years, Japan’s economic situation has looked like this:
“An asset price bubble pops, hitting bank balance sheets and tax revenues. As growth weakens and the economy flirts with deflation, the real burden of servicing debt increases.
Companies race to pay off debt, further dragging down growth. Government spending takes up the slack. Monetary policy is akin to pushing on a piece of string, so even zero interest rates have scant impact. Population decline compounds the vicious circle.”
Hardly a rosy picture, and unfortunately one that some economists are predicting to be replayed in other countries, particularly in Europe. The Japanese labour force’s growth rate started slowing down in the mid-1980s and by the mid-1990s the labour force was actually shrinking. According to the Boston Consulting Group, the workforce in Western Europe will decline by 2.4% by 2020, while Germany’s will contract 4.2%! (How long will they be able to bail out the rest of Europe?) Albert Edwards, a global strategist at French bank Societe Gererale said that world markets were following Japan’s lead and told investors in London that:
“‘In terms of nominal GDP growth, things are playing out in a very similar way to how they did in Japan.”
This view is backed up by Ajay Kapur, a strategist for Deutsche Bank in Hong Kong who dismisses the view that Japan’s economic woes since the 1990s are somehow reflecting specific national ‘cultural’ traits. Instead, he wrote in a report that:
“Equities are correctly worried about demographic turning points in almost every developed market and the potential impact on trend earnings growth, about excessive leverage, still-expensive property markets, heightened GDP volatility and more frequent recessions.”
One only has to look at this sobering statistic – in the next five years, all of the 18 developed countries for which Deutsche Bank has property market data going back more than half a century will see a decline in their working age population ratios. Furthermore, 60% of those countries will show an absolute decline in the number of citizens of working age, something that Kapur said was unprecedented. Also without precedent is the fact that all of the countries on Deutsche’s radar have outstanding bank credit that exceeds 100 percent of GDP. Reuters notes that:
“‘This combination of adverse demographics and high debt is lethal for property prices, which are still way overvalued in most countries in relation to incomes and rents’, Kapur said.
It was difficult to dismiss this confluence of events.
‘We probably need to go back to times of significant wars (and plagues) to see this sort of an environment, where leverage rose and working age populations declined,’ he wrote. ‘This time is different.’”
While working age population is only one factor when it comes to assessing economic growth, Japan’s experience can show us that ageing will be a big drag on mature, heavily indebted economies like Europe. According to Karen Ward, an HSBC economist:
“As the projections for working population stand, demographics alone could explain a large part of what are likely to be huge differences in economic performance in the coming years”.