Your Quarterly E-Zine
Edition 11 • December 2019

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Population growth is a combination of changes in the mortality rate (births/deaths or replacement ratios), fertility rates and net migration. Immigration has gained the headlines in recent years, while declining fertility rates have fallen behind replacement ratios across much of the world.

Urbanisation has been widely associated with economic and social transformations, brought greater geographic mobility for families, lower fertility rates, longer life expectancy and aging populations. Industrialisation and the introduction of technology in the rural environment have hastened the move into the cities as it took less and less people to produce the same amount of food and so rural families didn’t need as many children as in previous generations. An increasing trend towards urbanisation has been accompanied by declining fertility rates for many countries.

In New Zealand, the fertility rate in 1960 was 4.0 births per child-bearing woman. By 2015 that rate had dropped to 1.99 births. The World Health Organisation estimates that an equilibrium fertility rate (replacement rate) is equivalent to 2.1 births per woman for most developed economies.

From the late 1940s through to the early 1980s, much of the developed world went through a massive demographic boom due to the arrival of the Baby Boomers. This huge surge in population growth, which was accompanied by better health outcomes and increasing life expectancy boosted economic activity around the globe. The Boomer effect created a massive one-off generational demand for life-span consumer staples and durable items. It meant increased spending on infrastructure, housing and associated services. It also increased the ratio of workers to consumers with the Boomer’s entering the workforce peaking around 1981. Since then, global savings rates have increased as this demographic bubble worked, saved and invested. This period of higher savings and investment has also coincided with falling inflation and interest rates.

The world economy also benefited from the increased demand/supply resulting from the collapse of Communism in the late 1980s. Hundreds of millions of previously isolated Eastern European consumers started working, travelling and consuming the same goods as the rest of the developed world. This expanded global trade significantly. And then in 2001, China became part of the global economy with admission to the World Trade Organisation (WTO). By around 2010, nearly 100% of the world’s population was living in a form of capitalism, up from 30% less than two generations previously.

While the demand for goods and services around the world has expanded, so has the supply of labour. This increasing supply of labour, along with technological innovation and the impact of global competition (e.g. Amazon) is a key reason why global incomes have stalled for the average worker over the last three decades. As labour costs have been suppressed as a share of business costs, boosting earnings and profits, companies have been incentivised to retain a labour-intensive approach (outsourcing) rather than investing in new capital. This most likely is a contributing factor to declining productivity levels around the world over the same timeframe.

The implications for investments are obvious. As populations age, workforces in general are declining in size. Globally, the ratio of workers-to-consumers, known as the support ratio, has already peaked after rising for several decades. A slower expansion of the labour market will reduce overall economic growth. This will impact some companies more than others but will also have an impact on the rate of savings growth and probably inflation and interest rates (fewer workers, less tax revenue, more healthcare costs, increasing social welfare costs, higher debt etc).

Some global companies are already experiencing this demographic impact on demand for their goods. Falling birth rates are reducing demand for baby and child related staples while some countries such as Japan are introducing incentives such as child-care and free tertiary fees to boost fertility rates and support females re-entering the workforce.

With the aging population mega-trend and declining fertility rates well established, it’s ironic that immigration, as a solution to declining global work forces, has become a rallying call for populist political movements.

In general, people emigrate to improve their lives – very few would move from a wealthy country to one less well-off. And so, in aggregate, global immigration should be seen as one way to lift people out of poverty. And it has, on a global scale. Well-managed migration should be a benefit to the countries of origin and destination as well as to the migrant and family. However, the focus for many has been on the negative aspects of migration – the fact that it’s often low skilled migrants moving and doing lower productive jobs for low wages. Besides suppressing incomes for resident citizens, low skilled migrants are often a strain on social safety nets.

New Zealand has an aging population, but in recent years also has one of the fastest rates of population growth in the developed world. In 2016 our population growth rate was 2.1%, well above the global average of less than 1%. With our fertility rate declining just below the replacement rates, our current population growth is mostly due to net migration. But New Zealand’s population growth rates have fluctuated over the decades with a recent generation peak of +2.5% in 1962 to a trough of -0.4% in 1979. We have seen population growth spikes in 1974 (+2.1%), 1996 (+1.6%), 2003 (+2.0%) and 2016/17 (+2.1%). In between, growth rates have troughed in 1979 (-0.4%), 1986 (0%) and 2012 (+0.6%). Each of the recent growth spurts in population (1983, 1996, 2003 and 2016) has been accompanied by surge in house prices as demand spikes.

According to the United Nations, in 2015 244 million of the world’s 7.4 billion population were migrants. That is, people who lived in countries outside their place of birth. Of that 244 million, 20 million were refugees. Our World in Data estimated that 705 million people lived in extreme poverty in 2015 (9.5% of the total population). Extreme poverty was calculated as those living on less than USD1.90 per day.

As populations age, workforces need to be replaced by either migrants or machines. For immigration to work, skills need to be targeted and assimilation both culturally and educationally (second and third generations) is important. While business owners like abundant cheap labour, this doesn’t necessarily fit in with the broader social and economic goals. Migration flows are important from a humanitarian and in some cases growth perspective, and will continue. But if it becomes disorderly, populism and protective agendas will increase in a significant part of the world.

Kevin Stirrat
Head of Investment Strategy

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