By John Richardson
DEMOGRAPHICS are hugely important in shaping economic growth because of the evidence that spending patterns change as populations age. So, of course, demographics help determine petrochemicals demand growth.
You might think these statements fall into the category of the glaringly obvious. Apparently not, based on the policy decisions of governments and today’s vast petrochemicals overcapacity. Petrochemical investors seem to have missed the impact of ageing populations on growth, especially in China.
Fellow blogger Paul Hodges and I have been making the case for the links between demographics and economic growth since 2011. We need to continue to make the case as this is so, so important – and also because I believe that not enough people are listening.
Let’s start today’s discussion with the chart below, courtesy of New Normal Consulting, drawing on US Bureau of Labor Statistics data.
Consumption is 60%-70% of GDP in most developed economies, wrote in the ICIS Chemicals & Economy blog.
The chart highlights how spending declines as people pass the age of 55. In 2000, there were 65m Wealth Creator 25-54 households, each spending an average of $69,000. This compared with 2022 when there were 66m Wealth Creator households, each spending an average of $82,000 ($2022).
In other words, there was no growth in the number of Wealth Creators, but their spending (supported by furlough payments) did increase in real terms. But look at what has happened to the Perennial (55+) households: Their numbers increased by 25m to 61m between 2000 and 2022 – with their spending is 20% less at only $66,000. The data for Germany and France are very similar.
We can therefore conclude that overall developed-world consumer spending will decline as the Perennial demographic cohort expands in size.
When you retire you have already bought most of the things you need, and you are living on a pension that will often not fully replace your income. We are as a result seeing the growth of a Replacement Society, where new goods are only purchased when old goods have worn out.
The above chart, based on UN Population Division data, shows that the Perennials will account for 35% of high-income countries’ populations between 2025 and 2030, up from 31% in 2020.
Meanwhile, the Wealth Creator demographic (those between 25 and 54) will see their percentage share of the rich world’s population fall to 38% to 41%. A further consequence of the fall in births per woman below the population replacement rate of 2.1 is the projected fall in the percentage of those under 25 to 27% from 28%.
It is the Wealth Creators that are the main driver of consumer spending because they settle down to start families. Raising children generates lots of additional demand for housing, education and transport etc. As the Wealth Creators grow older their careers progress, meaning higher incomes and thus greater disposable incomes, especially when the kids have grown up, have left home and have finished their education.
Now let’s focus on the G20 countries, again with the help of the ICIS Chemicals & The Economy blog and New Normal Consulting. Together, the countries account for 75% of global GDP.
We need to divide the G20 into three categories: Rich but Old, Poor & Young and Poor & Ageing. Saudi Arabia stands out in a category of its own as being Young and Rich. But its population (and also its polyethylene demand as we shall discuss later) is too small to make a significant difference to the overall patterns.
In per capita income terms, the differences were vast in 2023, according to the IMF: The Rich but Old countries had average per capita incomes of $49,140, the Poor & Ageing $12,773 and the Poor & Young $12,175.
Much higher per capita incomes in rich G20 countries might be seen as giving them the ability to easily afford rising healthcare and pension liabilities because of the resulting bigger tax base. Not so I am afraid because of the perilous debt position of Western governments following the $72trn of global economic stimulus since the Global Financial Crisis.
Rescuing economies from the Global Financial Crisis was step one towards this total, including China’s huge and counterproductive 2009 stimulus package. Step two was the money pumped into economies during the pandemic. The pandemic illustrates that the challenges we face are not one dimensional. There are many other factors in play along with demographics. But demographics are at the centre of today’s difficulties.
A further example to this point is the “end of the peace dividend”, signalled first by Russia’s invasion of Ukraine and then the Israeli-Palestinian conflict. I fear we may see a return to levels of defence spending during the Cold War as conflicts intensify and spread.
The peace dividend following the collapse of the Berlin Wall in 1989 had given the world in general, not just the rich world, more money to spend on healthcare, education, pensions and infrastructure etc.
Demographics denial: A very strange argument
China takes centre stage because of its dominant role in driving global petrochemicals demand and the global economy. My 17 January post detailed the economic and petrochemicals implications of its rapidly ageing population.
China and Russia fall into the category of middle-income countries as well as comprising the Poor but Young division of the G20. They are at risk of failing to become high-income countries because of their ageing populations. They confront “middle-income traps”, a defining economic force identified by the Nobel Prize-winning economist, Sir Arthur Lewis.
Between 2025 and 2030, all the world’s middle-income countries will see the percentage of their populations accounted for by the Perennials increase to 23% versus 17% in 2020., again according to the UN Populations Division. The Wealth Creator share is forecast to slip to 37% from 42% with the Under 25s expected to remain unchanged on 41%.
Here’s a repeat of a slide from my 17 January where I placed China’s demographic challenges in the context of its other related economic difficulties. Demographics are a trigger for all the other challenges.
One of the strange arguments I often hear is that China’s ageing population is a demand problem for tomorrow rather than today. This doesn’t stand up to statistical analysis.
For example, the number of people getting married in China fell from approximately 13.5m couples in 2013 to approximately 6.8m in 2022, a 50% decline. A further difficulty is that the ratio of male-to-female births ratio in China is high relative to other countries. This obviously means an impact on demand for housing and for spending connected with raising kids.
As for the Young but Poor G20 countries of Argentina, Brazil, India, Indonesia, Mexico, Turkey and South Africa, the World Bank data on births per woman at first glance suggests a much more positive outcome.
China’s births per woman first fell below the population replacement rate of 2.1 in 1999 and have stayed there ever since. This indicates how long it has taken to reach today’s demographic crisis.
Because births per woman didn’t fall below the population replacement rate 2.1 in the Poor but Young G20 countries until 2016, one could argue that the countries will benefit from many years of the demographic dividend of a youthful population.
But some 70% of the Indian workforce work outdoors, placing its economy at risk of significant damage from climate change. The country lacks sufficient decent sanitation, public healthcare and education.
The World Bank wrote in a 2022 analysis of middle-income countries that they “have unfinished development agendas and risk being ‘trapped’ in middle income status if they do not further their own economic, social, and structural transformation.
“As countries reach middle income status, they encounter ‘second generation’ or ‘frontier’ reform challenges that reflect the more advanced stage of their development. Challenges such as lifestyle diseases, ageing populations, pension reform, tertiary education, social inequality, competitiveness, trade and tax policy, financial literacy, green growth, and urbanisation are typical.”
While youthful populations offer opportunities, this does not guarantee success. Neither do ageing populations guarantee failure. But I believe that the short-term debt and investment-driven economic strategies of the rich world and China have been wrong.
The rich world needs to for example raise retirement ages, while China needs to transfer wealth from its very small minority of wealthy people to the rest of the population who remain poor despite the country’s great achievement in lifting hundreds of millions of people out of extreme poverty. The Pew Research Institute estimated that just 23m Chinese citizens in 2020 earned more than $50 a day.
But politics often get in the way of raising retirement ages in the rich countries. As Peking University professor Michael Pettis describes the scale of the wealth transfers necessary in China to achieve significant improvements in healthcare and pension systems make the transfers politically very difficult.
Without big wealth transfers, including much higher wages for China’s average income earners, sustaining today’s levels of 4-5% GDP growth seems just about impossible, given that the alternative of investment or export-led growth is likely to runup against a wall of reshoring in the West. And the West’s demand for imports of manufactured goods looks set to decline because of ageing populations.
The G2O, demographics and the implications for global polyethylene
The ICIS Supply & Demand Database is a great resource for strategic planning. Take the slide below as a good example.
Note that I excluded the statistical outlier of G20 country Saudi Arabia (Rich and Young). But this makes very little difference as Saudi Arabia accounted for 1% of global PE demand between 1992 and 2023.
As mentioned earlier, demographics do not shape outcomes in isolation. The economic benefits of favourable demographics during most of the years between 1992 and 2023 were compounded by:
- Deng Xiaoping’s Southern Tour in 1992 which led to economic liberalisation and an export-driven China economic boom.
- The Maastricht Treaty in 1993 led to the formation of the EU, accelerating globalisation.
- In 2021, China gained admission to the World Trade Organisation. This removed the tariffs and quotas that had restricted its exports to the West. Demand for China’s exports was strong because the Baby Boomers had yet to retire in big numbers.
- And then China launched its huge economic stimulus package in 2009 following the Global Financial Crisis.
But:
- 2013 was the year when the average Baby Boomer turned 55, marking an acceleration towards the Replacement Society.
- 2021 and the deflation of the real estate bubble marked the end of China’s “economic miracle”.
- Russian’s invasion of Ukraine in 2022 saw the beginning of the end of the peace dividend.
- The weak economic recovery from the end zero-COVID in 2023 focused belated attention on China’s deep and long-standing structural challenges. But it was too late to prevent the vast petrochemicals overcapacity. The Israeli-Palestinian conflict was further pointer to the end of the peace dividend.
Consider today’s final chart.
The G20 countries accounted for 78% of global PE demand in 1992-2023, in line with their three-quarter share of the global economy.
The Rich but Old countries saw average annual PE demand growth of 2% with the Young & Poor countries seeing annual average growth of 6%. China grew at 10%. Russia grew at 7% but from a much lower base than China.
Global PE demand increased by 140% at an average of 2.8m tonnes a year. Our base case is for annual average growth to accelerate to 3.4m tonnes in 2024-2040. But given the discussion above, you need alternative scenarios. Contact ICIS at john.richardson@icis.com for the details.
Conclusion: Demand-led petrochemical strategies
There’s obviously little that petrochemical companies can do to shape the policy outcomes that will determine whether countries make a success or failure out of their demographic trends.
What companies cand and must do, though, is to make their own demand. They need to move away from the supply-driven strategies that worked fine for most of the time between 1992 and 2023, but not now.
Suggestions about the details of demand-led strategies will be the subject of future posts.