Companies and investors often say “we don’t need to think about demographics – its too far in the future to matter”. This might have been true 20 years ago, but not today. As European chlorine industry demand confirms, the truth is that “history catches up with us”.
The reason is simple. Europe stopped having enough babies to replace its population with the end of the BabyBoom in 1970. Today, women have just 1.7 babies each, compared to the 2.7 babies/woman seen in the early 1960’s. Replacement rate would be 2.1 babies. And this, of course, matters enormously for demand:
- Consumption is around 2/3rds of GDP in developed economies
- And it is those in the ‘wealth creator’ 25 – 54 age group who drive spending and economic growth
Of course, the overall European population is still expanding today. But this is mainly because of the dramatic increase in life expectancy. This means someone aged 65 can now expect to live for 20 years in retirement. And older people contribute much less to GDP growth
- They already own most of what they need
- And their incomes decline as they enter retirement.
The chart above of chlorine production and operating rates highlights the impact of these two developments for demand. The reason is that chlorine, and its co-product caustic soda, are essential products in modern society. Based on salt, they are used in applications ranging from construction through to water treatment, detergents and pharmaceuticals. Based on Eurochlor data it shows:
- Annual chlorine production on the left, and operating rates (%) on the right since 2007, with Q1 2015 annualised
- In 2007, production was 10.7MT (black line) and operating rates averaged 84.5% (red)
- They have never been close to this level since, with 2010 the peak year at 10MT and 79% operating rates
The key is the decline in construction and therefore PVC demand.
As the chart on the left shows, based on Eurostat data, this peaked in 2007 and has never recovered. Part of the reason is the end of the speculative rush to build second homes in countries such as Spain. Vast numbers of these apartments have never been occupied, and the local population in most holiday resorts is not big enough to fill the gap.
The other reason, of course, is the ageing population and lack of babies.
Young adults normally provide major support for construction markets. They have to set up home for the first time, and then they often need to have bigger homes when they start a family. Equally, employers have to build offices and factories where they can work.
But older people already have somewhere to live, and are instead leaving work to retire. They might in the past have thought about buying holiday homes, but today they are increasingly concerned about having sufficient savings for their retirement.
The relative lack of young people since 1970 has enormous consequences for future economic growth. As the head of Copenhagen’s University Hospital’s fertility clinic warned last year:
“We have for many years addressed the very important issues of how to avoid becoming pregnant, how to avoid sexual diseases, how kids have a right to their own bodies, but we totally forgot to tell them we cannot have children forever.”
These demographic changes mean that Europe’s adult population is increasingly being dominated by people in the 55+ generation for the first time in history. Even in 1950, life expectancy at birth was roughly equal to retirement age at 65 years.
The result, as European chlorine demand confirms, is that the European economy has gone ex-growth. And as the European Central Bank is just beginning to realise, you can print money, but you can’t print babies.