45-year baby drought stalls Western economic growth

Consumer demand

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Life expectancy May15

200 years ago, most blog readers would have been dead at their current age.  Life expectancy in the West was just 34 years in 1820, and averaged only 24 years everywhere else.  Today, as the chart shows, Western life expectancy has risen to 79 years (red area).  In the the emerging economies, it has nearly trebled to 68 years.

Of course, some people did live longer, but even in the West, you would have been lucky to reach 40.  Since then, however, as The Atlantic magazine noted last year:

Beginning in the 19th century, that slowly changed. Since 1840, life expectancy at birth has risen about three months with each passing year.

In turn, this produced an astonishing rise in living standards.  If we go back to 1700, Western GDP/capita had hardly changed in the past thousand years.  But since then, it has risen from $475 to $29k today.

Life for most of us is no longer “nasty, brutish and short”, as Thomas Hobbes wrote in 1651.  Instead, 4 elements combined to completely change the world in which we live:

  • The first was the invention of smallpox vaccination in 1796.  Before this, the French writer Voltaire estimated that 60% of the population caught smallpox, and up to 40% died of it. The discovery spread slowly at first, but by 1850 many countries had made vaccination compulsory to protect their populations.  And once the concept of vaccination had been discovered, many more diseases were brought under control
  • Next was disinfection, which began with the chlorination of drinking water.  The role of water in spreading cholera and typhoid was first discovered in 1854,  But as with vaccination, it took some time to overcome the objections of the “experts”, who claimed these diseases were airborne.  But in 1898, the English town of Maidstone chlorinated drinking water for the first time.  And today, 90% of the world’s population have access to safe drinking water.  As Life Magazine wrote in 1998: The filtration of drinking water plus the use of chlorine is probably the most significant public health advance of the millennium.
  • The development of pharmaceuticals built upon these strong foundations.  The key first step was the discovery of penicillin by Dr Alexander Fleming in 1928, which led to the development of today’s antibiotics, as well as other major drug discoveries and the growth of the pharmaceutical industry.  Drug discoveries know no boundaries, and thus a sulphonamide drug discovered originally by the German company, Bayer, saved the life of Britain’s wartime leader, Winston Churchill, in 1943.
  • Today. we are learning more and more about the importance of diet, and of healthy lifestyles, as I shall discuss in more detail next Friday

But now, another paradigm shift is underway, with equally far-reaching consequences:

  • The post-War Western BabyBoom created the largest and wealthiest generation in history.
  • As they grew up, they created the biggest economic boom ever seen, as they joined the 25- 54 age group
  • This is when incomes and spending rise exponentially as people get jobs, settle down with partners and buy houses, cars and many other consumer products
  • In turn, this cohort – the ‘wealth creators’ – drive economic growth, as consumption is around 2/3rds of GDP in most developed economies

But one thing the Boomers didn’t do was have many children of their own.  After 1970, fertility rates collapsed below replacement levels (2.1 babies/woman) in Western countries.  China saw the same development from 1990.  So today, we have relatively fewer young people in the wealth creator cohort.

Even worse, from the viewpoint of economic growth, the vast increase in life expectancy meant adults no longer died below retirement age. People who reach the age of 65 now have a life expectancy of nearly 20 years.

This combination is a disaster for consumer spending.  The relative lack of wealth-creators is only part of the problem. The other key factor is that the over-55s spend less and less as they get older. They already own most of what they need.  And on retirement, the vast majority move  from a salary to a relatively low fixed income pension.

Stimulus programmes are clearly irrelevant given these headwinds.  They simply pile more debt on the shoulders of today’s wealth-creators.  This is completely unfair, as they already have to finance the pensions of their parents’ generation, as most countries operate ‘pay-as-you-go’ systems.

Of course, what is bad for the economy is wonderful for us as individuals.  It is also good news from an environmental viewpoint, as lower demand will help to preserve the planet for future generations.

But as we argue in Boom, Gloom and the New Normal, this paradigm shift means that ‘business as usual’ strategies will likely prove a recipe for no business at all.  Past performance is no guarantee of future success, as we move forward into the brave new world of tomorrow.

 

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