Europe can win despite age trends

Consumer demand

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AffordabilityWe all know that Europe has an ageing population.  Germany and Italy, for example, have median ages of 45 years.  And fertility rates have been below replacement levels for 45 years, so the relative number of higher-spending young people is reducing.  Instead, there are more and more older people, as life expectancy at age 65 is now around 20 years.

But this is not ‘doom and gloom’.  It is a challenge and an opportunity for companies and investors who prefer to deal with reality rather than the wishful thinking of central bank stimulus programmes.

The key is a shift in mindset.  As the chart shows, we need to move away from business models based on ‘value-added’ and ‘affordable luxury’.  Ageing populations living on fixed incomes can no longer afford them.  Instead, as I describe in a new analysis for ICIS Chemical Business, affordability must be our key driver:

Major change is underway in petrochemicals and plastics.  For the first time in decades, the industry is starting to be driven by demand issues, rather than by supply.  The reason is that we can no longer reliably forecast future product demand by simply using a multiple of IMF growth forecasts for GDP.  In turn, this means business models have to evolve.  We need to become more service-based in our approach, and take advantage of the vast pool of expertise in the industry.

“China’s adoption of its ‘New Normal’ economic policy has been the catalyst for this change:

  • On the supply side, it has abandoned the ‘growth at any cost’ model that had allowed pollution and corruption to flourish
  • On the demand side, it is deflating the lending bubble that had artificially boosted demand by creating property wealth effects

“Business models based on exports to China are backfiring badly as a result.  Mining and luxury goods manufacturers are first in the firing-line, as are countries that had taken soft options for growth by exporting commodities to China.  Related industries such as shipping are also facing hard times, as are the global real estate markets used for laundering illegally-gained wealth in China.

“Oil markets highlight the depth of the change underway.  Now the myth of $100/bbl oil forever has been punctured, it is clear that over-investment has taken place on a massive level in recent years – leaving behind a supply glut in all types of energy – oil, natural gas, coal and renewables.  Similarly, the myth of high operating costs has been exposed by the IMF, which has highlighted how only Brazil and the UK need prices above $30/bbl.

“This is good news, of course, as low energy costs will help us to respond successfully to the shift in demand patterns being created by today’s ageing of the global population.

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