As the Federal Reserve and central bankers around the world
try to kick start growth there is a long term indicator that points to slow
growth for many years to come – birth rates.
Not since the Great Depression have birth rates been so low. This low birth rate is having a profound
impact on long term economic growth rates but unfortunately the authorities
continue to ignore this important piece of economic input and continue to
provide overly optimistic forecasts.
The Federal Reserve continues to project that the economy
will grow at a rate of 3.0% or greater for the next three years and then they
expect it to slow to 2.3%. This is the
same growth rate that they have predicted for the past few years and each year
these forecasts are slowly ratcheted down during the year to 2.5% or lower by
year end. Whether they actually believe
these forecasts or are just trying to sell hope is anyone’s guess but looking
at one of the main economic drivers, birth rates, it is clear that regardless
of what they predict slow growth will be with us for years to come.
Throughout the developed world birth rates are below
historic norms and below 2.1, the rate required to maintain a population. A number below 2.1 means the population is
contracting and above 2.1 it is growing.
In Germany, France, United States, Japan and the United Kingdom, the
birth rate is 1.7. Furthermore the
number of people in the labor pool in Germany, France and Italy has already
started to shrink. So not only is the
current labor pool not growing but the trend will worsen.
Part of the reason for this lack of growth is the financial
crisis. Couples who would normally have had
a few children are now having one or sometimes none for the simple reason that
the financial crisis had such an impact on their nest egg that it made them
reconsider the financial impact of having a large family. Not only did millions lose their houses but
many more lost their income so the thought of adding another mouth to feed,
clothe and school was just too much to bear.
Economists had expected that this phenomenon would quickly resolve
itself but the deepness of the downturn and the slow recovery have left couples
wondering if they will ever have the financial fortitude to have a large
family.
While this may be a temporary issue, the longer it continues
the larger the impact on the economic outlook.
Demographic trends are secular trends, in that they last for an extended
or secular period. So looking forward
with the loss of workforce participants economic growth will be muted. While some of this can be offset with productivity
gains there is still a smaller pool of consumers and this is where the impact
is really felt. Everything from
electronics to homes is affected and this ripples through the economy. Slower growth means lower profits and this
feeds into stocks and other investments that retirees rely on to live. In this scenario low interest rates become
the norm and markets are beaten down on a regular basis.
On the flip side global population growth caused concerns
regarding the ability of the globe’s food stocks to support this enormous population
so relief from this will be a good thing.
The problem is that the countries where the slowing is occurring will
soon be overtaken in population size by poorer economies, notably Africa, where
there are already too many problems to mention. So while the developed nations struggle with
slowing birth rates the developing world is growing at a feverish pace. This is why more and more of the profits of
global businesses are coming from outside of the developed nations and this is
a trend set to continue.
In Japan there are more adult diapers sold than baby
diapers, in Germany and Italy small towns are emptying and in South Korea where
births have fallen 11% in a decade 121 primary schools are vacant. The issues facing the developed world are
great and this trend is not quickly resolved by printing money. It appears therefore that the slow growth
that we are currently dealing with may be here for a much longer period than
any central banker will admit.
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