The Wall Street vet analyzes how big changes in population and productivity will affect investments.
We were all lucky to be born at the right time. Over the past fifty years, world gross domestic product growth has been averaging 3.6%, driven by employment increases and productivity improvements in roughly equal proportions. An exhaustive and important study by the McKinsey Global Institute concludes that over the next 50 years population growth will decline to 0.3% annually. If productivity continues to contribute 1.8%, overall growth will decline to 2.1%, a rate 40% less than during the past half-century. The implications of this slowdown on global changes in the standard of living and investment opportunities could be enormous.The developing world can improve its growth potential by adopting operational practices and technology used by the advanced countries (that is, by catching up), but the United States, Europe and Japan will continue to depend heavily on innovation to approach anything like their historical rate of growth. Those subscribing to Mohamed El-Erian’s concept of “the new normal” or Harvard Professor Alvin Hansen’s “secular stagnation” may turn out to be right, but for reasons somewhat different than they originally thought. I have been worried about a lack of demand causing a slowdown in growth. I had not thought that the main problem might be that there aren’t enough people out there to do the buying.The global economy grew sixfold in the past 50 years. Taking into account the projections above, it is only expected to grow threefold in the next 50. Population growth rose because of high fertility rates, declining infant mortality and longer life expectancy. Also, the number of people of working age (15-64) grew from 58% of the population in 1964 to 68% in 2014. The productivity improvement resulted from a shift from agriculture to manufacturing and services. Technology obviously played an important role. According to the McKinsey study, the average world employee today generates 2.4 times the output of his counterpart in 1964. Because Europe and the United States were relatively efficient in 1964, their productivity only rose 1.5% and 1.9% annually respectively, while South Korea and Japan rose 4.6% and 2.8% respectively. As expected, China’s productivity grew at 5.7% annually, but Mexico and Saudi Arabia experienced less than 1% annual productivity growth. The study notes that the productivity gap between the developed and the developing economies remains wide, at almost five times, providing a significant opportunity for emerging markets going forward.The big change in the future will be the slow growth in population. Fertility rates are declining, and the average age of the population in Europe, China and Japan is rising. China’s peak employment is expected to occur in 2024. The working age population in the G19 countries plus Nigeria is expected to decline from 68% to 61% over the next 50 years. By 2064 India’s employment could expand by 54%, while China’s could shrink by 20%. The number of employees in the United States is expected to continue to rise, but at a slower rate than in the past. By employing more women and encouraging people to stay at their jobs beyond age 64, the expected 0.3% rate of working population growth could double, but that would still be well below the pace of the last 50 years.The McKinsey estimates of annual population growth seem low to me, but the concept of slower growth in the number of people in the world appears sound. A somewhat less pessimistic study of population growth was prepared for me by Dick Hokenson, the demographic analyst at Evercore ISI. He points out that the G19 plus Nigeria universe includes Germany, Russia, Japan, China and South Korea, all of which will experience overall declines in their populations and labor forces over the next fifty years....MUCH MORE
Byron Wien on Population Growth and StocksWien is vice chairman of Blackstone Advisory Partners LP, where he acts as a senior advisor to both Blackstone and its clients in analyzing economic, social and political trends.
