The Bull

Tuesday 29

July, 2014 8:29 AM

Industry Chart

TheBull PREMIUM

  • Trends
  • &
  • Opportunities

2 Reasons Why The Global Economy Will Slow

2 Reasons Why The Global Economy Will Slow

By Expert Panel 19.03.2012


The coming years will be marked by a seismic change in the economic landscape in the US. Firstly and most importantly, we are going to see economic growth slow down dramatically. Jeremy Grantham, an asset manager I respect, believes we’ll see global growth at 2% over the next seven years. Personally, I believe it could be even lower than that.

The reasons for this slowdown are myriad, but the most important are:

1) Age demographics: a growing percentage of the population will be retiring, while fewer younger people are entering the workforce.

2) Excessive debt overhang.

Regarding reason #1, Europe is the most glaring situation. According to Eurostat, between 2004 and 2050, the number of people of non-working age relative to those of working age will increase dramatically. In the EU, in 2004, there were approximately four people of working age (19-64) for every person of non-working age (65 and older). By 2050, this number will have dropped to only two people of working age for every person of non-working age.

Over the same time period, Europe will also see a tripling in people considered to be “elderly” (80 or older) from 18 million to 50 million.

These numbers alone go a long way towards explaining why Europe is facing a budgetary crisis of epic proportions. All of these retirees will be expecting various government/ private sector outlays whether they are pensions, healthcare, or various other social services.

These issues are, for the most part, left out of most current analysis of Europe’s debt crisis. Indeed, while the vast majority of commentators are well aware of Europe’s official Debt to GDP ratios, when we include unfunded liabilities such as the government outlays or social programs I detailed above, it is clear that the situation in Europe is far, far worse than is commonly known.

Jagadeesh Gokhale of the Cato Institute presents the situation with an interesting data point, “The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely.”

The situation is not quite as profound in the US, though we will be seeing a dramatic increase in the age dependency ratio (the number of people of retired age relative to those of working age) between 2010 and 2030 as the Baby Boomers retire: in 2010, there were 22 people aged 65 and older for every 100 people of working age. By 2030, this number will have grown to 37 people aged 65 and older for every 100 people of working age.

However, while the ratios are not as poor in the US as in Europe, the unfunded liabilities the US faces are truly astronomical. USAToday puts the number at $61.6 trillion in unfunded obligations, an amount equal to roughly $528,000 per US household.

However, Japan makes both the EU and the US look tame. In 2009, Japan already had 35 people aged 65 or older for every 100 people of working age. However, by 2050, this number will have swelled to an incredible 73 people aged 65 or older out of every 100 people of working age. This among other things sets Japan as a ticking time bomb, which we will assess in another report.

The EU, Japan, and the US comprise $36 trillion of the global $64 trillion economy (roughly 57%). So this debt overhang will have a profound impact on global growth particularly in the developed world going forward.

This debt overhang will result in several developments from a political perspective. For one thing, the social contract between governments and retirees will have to be re-negotiated, as the money promised by the former to the latter simply isn’t there.

Governments will try to deal with this in one of two ways: by raising taxes on high- income earners/ any other potential avenue for raising revenues and by reneging on the promises made to retirees.

The impact these moves will have on the political landscape will be profound. Among other things, we will be seeing more protests both at the ballot box and in the streets (Greece’s riots are a taste of what’s to come for much of Europe and eventually the US).

To picture how a cutback in social programs will impact the US populace, consider that in 2011, 48% of Americans lived in a household in which at least one member received some kind of Government benefit. Over 45 million Americans currently receive food stamps. And 43% of Americans aged 65-74 are Medicare beneficiaries.

Consider the impact that even a 10% reduction in these various programs would have on the US populace.

With that in mind, people will have to make do with less. This will have a profound social impact, as it will force many more traditional values to come to the forefront of American culture again. Among other things I believe individualism will give way to more community-focused lifestyles: whether they be food co-ops, neighborhood watches, or simply having to live with relatives, the nuclear family and local community will become increasingly important as an emotional and economic support. Savings will increase and entertainment expenditures will become more frugal (Netflix vs. going to the movies, camping vs. more expensive vacations, etc.)

More importantly, the political process will change dramatically in the developed world, as politicians will no longer be able to promise social benefits and other handouts in order to incur votes.

From an economic growth standpoint, these age demographics and their accompanying debt overhangs will act as a drag in the developed world. Regrettably, this will likely lead to increase geopolitical tensions (much as we saw in the Arab spring) as times of economic contraction usually result in increased conflict both in terms of trade (the US and China) and actual warfare (the Middle East).

However, the fact remains that we will witness a "Global Debt Implosion". It has already begun in Europe and will be coming to Japan and eventually the US.

Graham Summers, Chief Market Strategist for Phoenix Capital Research

 

>> Next article - click here to read other articles 



FROM THE NEWSLETTER

Gold's strong season starts

Gold's strong season is just getting underway,... More

World oil production - where are we headed?

The cost of producing oil is rising much more... More

Stocks on a roll: ASX rolling 52-week highs

ASX rolling 52-week highs for the previous... More



WHAT’S ON THIS WEEK

week 1 August 2014
    • 28
    • Australia-Israel Chamber of Commerce lunch Business Council of Australia president Catherine Livingstone speech at Australia-Israel Chamber of Commerce lunch | 2:23 AM
    • ANZ ANZ chairman David Gonski and other business leaders speaking at Governance Institute of Australia lunch | 3:18 AM
    • 29
    • AOFM AOFM to issue $100 million of February 21, 2022 Treasury Indexed Bonds | 1:01 AM
    • ALS ALS Group annual general meeting | 1:01 AM
    • HIA Housing Industry Association new home sales data for June | 1:02 AM
    • PRU Perseus Mining quarterly activity report | 2:18 AM
    • 30
    • AOFM Australian office of Financial Management (AOFM) to issue $700 million of April 21, 2024 Treasury Bonds | 2:17 AM
    • 31
    • ABS Australian Bureau of Statistics (ABS) building approvals for June | 1:00 AM
    • RBA Reserve Bank of Australia releases financial aggregates for June | 1:02 AM
    • AOFM AOFM to issue $500 million of Treasury notes, maturing on December 5, 2014 | 1:02 AM
    • ABS ABS international trade price indexes for June quarter | 1:54 AM
    • ORG Origin Energy quarterly production report | 2:17 AM
    • 01
    • ABS ABS producer price index for June quarter | 1:00 AM
    • RBA RBA index of commodity prices for July | 1:03 AM
    • PMI Australian Industry Group performance of manufacturing index (PMI) for July | 2:18 AM
    • WPL Woodside Petroleum general meeting to vote on the buyback of shares from Royal Dutch Shell. | 2:19 AM
    • AOFM AOFM to issue $500 million of October 21, 2018 Treasury Bonds | 6:46 AM

TheBull.com.au

TheBull.com.au

TheBull PREMIUM article search

STOCK QUOTE

Don't know the company code? Click here



Featured Comment

The Brisbane-based firm should have a prime spot on portfolio watch-lists, such is the long-term potential of the personal legal services industry in Australia and the United Kingdom.

The one stock that keeps shining

Broker buys

  • ASX Code
  • Company
  • Broker
  • IREIressWilson HTM
  • RIORio TintoWilson HTM
  • CCPCredit CorpPhilip Capital
  • COECooper EnergyPhilip Capital
  • TLSTelstraMorgans CIMB
  • NABNAB LtdMorgans CIMB

Broker sells

  • ASX Code
  • Company
  • Broker
  • CGFChallengerWilson HTM
  • DLXDuluxWilson HTM
  • SMXSMS TechPhilip Capital
  • OKNOaktonPhilip Capital
  • SAISAI GlobalMorgans CIMB
  • EGPEchoMorgans CIMB

Central Banks Rates

  • RBA2.50%
  • FED0.25%
  • BOE0.50%
  • BOC1.00%
  • RBNZ3.25%
  • ECB0.15%
  • SNB0.00%
  • BOJ0.10%

Upcoming dividends

  • ASX Code
  • Company, Div., Franking
  • Ex-Div.
  • IBCIronbark Capital Ltd, 2c, 100%15/12/14
  • CYACentury Aus Inv Ltd, 2c, 100%10/09/14
  • MHIMerchant House Intl Ltd, 0.5c, 0%20/08/14
  • WICWestoz Inv Co Ltd, 4.5c, 100%07/08/14
  • OZGOzgrowth Limited , 0.75c, 100%07/08/14
  • SGTSingapore Telecom Ltd, 8.6c, 0%01/08/14
  • CUPCountplus Limited, 3c, 100%28/07/14

Eight brokers like these stocks

  • ASX Code
  • Company Name
  • Consensus Target
  • DOWDowner EDI Limited$5.78
  • FMGFortescue Metals Grp Ltd$6.89
  • ORAOrora Limited$1.51
  • RIORio Tinto Limited$81.22
  • CSLCSL Limited$73.30

Upcoming Floats

  • ASX Code
  • Company Name
  • Float Date
  • GVFGlobal Value Fund Ltd14/07/14
  • TPN3P Learning Ltd16/07/14
  • DXBDimerix Bioscience Ltd28/07/14
  • BALBellamys Aus Ltd30/07/14
  • ECO8Common Ltd22/08/14

PLEASE SUPPORT OUR SPONSORS, AUSTRALIA'S LEADING BROKERS:



© Copyright The Compare Group Pty Ltd. All rights reserved.