Long-Term Visibility

by | January 4, 2021

The turn of the year brings a plethora of 2021 forecasts. The value of such outlooks is questionable, as amply demonstrated by 2020’s unforeseen pandemic shock. Short-term forecasts are an occupational hazard for many an economist, market strategist or political consultant. However, there are benefits to looking a decade, or even a generation, into the future. Certain trends are fixed, pressure points are noticeable, and the answers to secular questions are of great relevance to today’s economic, investment and policy deliberations.

The die is cast in terms of demographics. At a country level, migration or changes in labor force participation can have marginal effects—putting to one side the horrific possibility of future pandemics with even worse mortality. Otherwise, as the United Nations observes, “in contrast to highly uncertain forecasts of economic growth or technological advancements, the near future of world population is relatively certain, because it is determined largely by fertility and mortality patterns that unfolded over the past several decades”.

The global population is currently 7.8 billion, growing 1% a year, with life expectancy of 73 years. 55% of the population lives in urban centres. By 2030 it will be larger (8.5 billion), older and wealthier. In the coming decade 700 million people will retire and 1.3 billion will enter the work force. Many of those new workers will be in ‘young’ regions such as Africa, whose population will grow by 40%. China’s ageing demographics mean that its workforce is expected to decline by 3%. Within a generation, India will overtake China as the world’s most populous country. Europe’s population will stagnate unless major changes in migration are permitted.

What does all this mean?

A standard economic tool is the life cycle theory, which states in brief that households consume more than their income when young—for instance borrowing to purchase a home—and save excess incomes in middle age to build up wealth, which they consume once retired. Hence by 2030, the average European household will be living off their accumulated wealth, the average Chinese household will be trying to build up savings, while most African households will be entering peak consumer spending. Broadly, the demands for government services are easy to see, ranging from healthcare through leisure to education.

Pension provision will be a growth market, and a complex one. By 2030, 30% of the European population will be aged over 60, versus 25% in North America or 17% in Latin America and Asia. Most countries operate pay-as-you go retirement systems, so pressures on taxes and national debt burdens will rise as the old age dependency ratio worsens.

Another growth area will be urbanization, especially across Asia. About 5 billion people are expected to live in cities by 2030. This helps explain the mega investment themes put forward by many asset managers, for example for water, infrastructure and urban transport.

Population growth also lies behind two interconnected stress points in the 2020s, climate change and biodiversity loss. Scientific warnings are growing, ahead of COP26 in Glasgow at year end, that humanity has about a decade to achieve a low-carbon transition. This is spurring governments to pledge carbon neutrality. Unfortunately for the planet, China’s aim is a distant 2060, while Finland and Austria aim for zero net carbon emissions as soon as 2030-35. Politically sensitive decisions will need to be made in the coming decade. Will China remain reliant on coal? Will oil and gas become stranded assets across the Middle East? Can Europe and the USA rebuild entire infrastructures ranging from heating and cooling to private transport that significantly reduce carbon emissions?

Trade in goods and services, as well as in financial and intellectual capital, will be steered in the coming decade by the outcome of the most important geopolitical battle since the 1980s (and before that since the 1930s) – the relationship between the USA and China. By most forecasts, China’s economy will outstrip America’s to become the world’s largest by 2035, possibly by 2028, although whether China can escape the middle-income trap remains uncertain. Can the USA create and retain an alliance of liberal democracies to contain an assertive China? Can conflict be limited to technological and economic rivalry rather than to military arenas? The implications will be profound for global trade and capital flows, as well as for national and international regulation of key industries. It remains to be seen whether the European Union can become sufficiently cohesive and strong that it is able to stand alongside the other two major powers, at least in terms of economic strength if not military might. And how will emerging giants such as India or Indonesia adapt to their new roles and responsibilities?

Within and across economies other ‘mega-trends’ are in the making. Rapid technological change, unprecedented monetary easing and exploding government debt pose key challenges to politicians, households and businesses with respect to inflation, inequality, productivity and debt outcomes.

Inflation experienced a long uptrend from the mid-1960s to the early 1980s, followed by dis-inflation to the present day. While central banks have been successful in preventing deflation from becoming entrenched, despite a succession of financial crises over the past quarter century, it is uncertain whether the coming decade portends stable prices, deflation or the re-emergence of more rapid inflation. The outcome matters. Risk models based on the past 40 years of market correlations would give false signals should inflation return.

Productivity growth also moves in long cycles. For the past two decades it has slowed globally, with devastating implications for average real wage growth, income inequality and the rise of populism. The explanations for the slowdown include demographics, stifled competition, the growth of services, slowing globalization and corporate short-termism. Despite rapid technological change, the most likely outcome remains one of low productivity growth, accompanied by skewed income distribution, with attendant political pressures to raise taxes and boost transfers.

Inflation and productivity outcomes are linked with another long cycle—the steady, more recently abrupt, rise in global indebtedness, now approaching $280 trillion or over 360% of global GDP. A vital question for the coming decade is what combination of mechanisms is adopted to cope with fiscal pressures: default, financial repression, public sector austerity, inflation or tax increases?

Humanity faces critical decisions in the 2020s. The coronavirus was a warning shot about our misalignment with nature – a prelude, perhaps, as scientists raise increasingly urgent alarms about the Holocene extinction.

We are adaptable, as demonstrated by our responses to the pandemic. That is vital if, as a species, humans are to successfully address the secular population, environmental, geopolitical, economic and social challenges that lie ahead.

The UN’s 2030 Agenda for Sustainable Development, which embraces the three core elements of economic growth, social inclusion and environmental protection offers a roadmap to progress. It should be followed so that we do not look back at the end of this decade and observe that 2020 wasn’t so bad after all. 

Filed Under: Economics

About the Author

Andrew Milligan is an independent economist and investment consultant. He is a Board member of the Asia Scotland Institute, an adviser to the Health Foundation, to Balmoral Asset Management and to the Educational Institute of Scotland, and a Fellow of the Society of Professional Economists. From 2000-20, Andrew was the chief market strategist for the global fund manager Aberdeen Standard Investments.

After graduating from Bristol University, Andrew started in H.M. Treasury where he specialised in the IMF and World Bank’s handling of the Latin American debt crisis. He then worked in turn for Lloyds Bank, the broker Smith New Court, and New Japan Securities as an international economist. In 1995 he entered the asset management industry, becoming Head of Economic Research and Business Risk for Aviva Investors. In 2000 he moved to Edinburgh to work as the Head of Global Strategy for Standard Life Investments, in charge of a team covering economic and market research, tactical and strategic asset allocation decisions, client advice and communications for retail and institutional clients globally.

After its merger with Aberdeen Asset Management to form Aberdeen Standard Investments, the company became the second largest active fund manager in Europe with over 30 offices across the major financial centres. Andrew is well known as a public speaker while his writing, commentary and interviews have appeared in all the mainstream media.

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