Every year brings its share of economic events that take us by surprise. But some economic trends can be spotted ahead of time. Robert Johnson, Director of Economic Analysis, Morningstar, shares his views on four trends to keep an eye on.
Trend #1: Demographics
Population growth around the world has slowed relatively dramatically. The U.S. went from 1.8% population growth in the ‘50s and '60s to 0.7% currently, and perhaps as low as 0.5% in 2016. It's very hard to grow GDP a lot faster than population growth. So, certainly, that's going to hold back growth.
In Japan, we are seeing the dire effects of a population slowdown. In China, we're just slowly kind of moving into that. India has a long way to go before it hits that demographic wall, so to speak. This is certainly going to weigh in on world growth.
Also, the mix of that population is changing. We've got fewer younger people than we used to, and that's changed things dramatically, especially in the developed world where now we're seeing more interest in things that are kind of health-related, travel-related, in general personal services-related, and a little less related to accumulating more goods. This is because on the older people side of the curve, people are downsizing and need fewer goods as they try to make their lives simpler.
On the other end of the scale, the millennials are more interested in experiences than status symbols and goods. That's another key worldwide trend that's weighing on the data and kind of shifting things more towards the service-oriented economy and also, at the same time, weighing heavily on commodities.
Trend #2: Commodities
Since 2010, we've been on a pretty strong downward trend in commodities though there was a little spike in some of the food-oriented commodities in 2011.
The demographic trend fits right in with commodities. It's really kind of holding things back. What do you need commodities for? You need them more for things than services. So, certainly, that's held it back.
Cheap money certainly has helped increase the supply of commodities. We see that in the U.S. shale industry. It has brought up the supply side of the equation. Demand stabilising and supply increasing has weighed on a lot of different commodity categories.
The elephant in the room is China, a big consumer of commodities. The one-child policy is beginning to slow down their population growth and their working-age population is about to go into decline mode. As that happens, they put more emphasis on internal consumption and a little less on infrastructure building and road building, the things that tend to be intensively commodity related. They use huge percentages of the world's copper supply, paper supply, lumber supply, and as they de-emphasise those categories, it will have a huge impact.
Even as the relative growth rate stayed at 6.8% in China, it has been held back by what's happening on this shift to a more consumption-oriented economy. Be it copper, nickel or oil, all are affected by slower growth in China. When China was growing rapidly, they were careless with their resources. They were flaring gas and running steel plants that wasted energy and created lots of pollution. They can't support that kind of pollution anymore. It's hard to get into Beijing Airport some days because of the bad pollution. That’s got them focused on reducing some of this heavy industry, which in turn is reducing the demand for commodities.
Looking at the world, what will determine if you are going to do well or not is if you a commodity user or producer.
India is more of a user and will probably do better. The U.S. has got a decent mix of use and production. Europe is probably on the beneficial side, and a lot of the developed world. Brazil and the Russia are very dependent on commodities. While they took advantage of the growth in commodities, they missed the opportunity to restructure their economies and to clean up their act and both still have big infrastructure and governance issues that need fixing.
Commodities are vital to Canada, but maybe not as much as people think. Canadian growth slowed as commodities slowed, but that tends to affect the western part of the country. The eastern part benefits from a strong U.S. auto industry, which helps the Canadian auto industry and the metals business. A better finance market in the U.S. helps some of the Eastern Canadian financial centers. Canada won't get a hit the way Brazil or Russia is being hit, but it's diminished the growth potential over the next several months and maybe even couple of years.
Trend #3: Technology
Over the next five years, the number of people in the working-age population is set to decline in the U.S. and even in China. That's created some pretty strong issues in terms of how fast a country can grow if it does not have an adequate number of workers. Though some technology will help offset the shrinking working-age population situation.
Trend #4: Economic Policy
The U.S. caught on early in looking at interest rates as a tool for a softening economy. The Fed used some of the more aggressive quantitative easing programmes, which were kind of unprecedented in past history. Europe was a bit slow to implement measures. Economic growth in the U.S. has been far stronger than it was in Europe, and part of that equation was the more favourable monetary policy.
Now that the U.S. has gotten the benefit of it and as inflation begins to pick up a little, they will need to raise rates. Most of the world is still in a mode where they will keep rates relatively low for some time. I think rates will stay pretty low this year, which will create a pretty conducive environment for growth. That may be why some are so optimistic that growth in 2016 will be better than growth in 2015, despite the unfavourable demographics.
As we look ahead, things will tighten up little bit in the U.S., but certainly not enough to slow the economy. Tightening will occur only as economic improvement occurs. The rest of the world will continue to benefit from low rates that will offset some of the poor demographics.
The above column has been taken from the online publication of India Markets Observer. The outlook for various asset classes, perspectives on the industry, investing insights, and the entire list of contributors, can be accessed here.
