Economies across the globe are struggling with ageing populations, new technologies and populist opposition to economic reforms, but there are bright spots for investors in the growing labour markets of India and Indonesia.
“We’re going to see changes in demographics like we’ve never seen before,” Michael Gallmeyer, professor of commerce at the University of Virginia, told the audience during his keynote presentation at the Investment Management Consultants Association annual conference in Sydney on Wednesday, September 30.
Gallmeyer presented a chart of the World Bank’s forecasts of labour productivity growth that showed net labour forces are likely to change dramatically between 2010 and 2050, with some highly developed countries shrinking, and a few emerging economies growing rapidly.
Japan is set to come off worst, with a potential working population of just 9 per cent by 2050, in the worst-case scenario, while Italy, Germany, Spain and Greece all come in under 20 per cent. The forecasts show that even China is ageing.
The biggest growth story is India, where a large number of workers will come online in a hurry in coming years. By 2050, India is set to have the largest labour force in the world, with 1 billion workers. The second largest? Indonesia.
That means “the market for skilled talent is going to skyrocket”, Gallmeyer said. Countries that rely on immigration, such as the US and Australia, will need to account for increased competition for highly skilled workers.
Of course, other factors will play a role in growth as well. Gallmeyer says advances in information technology will eventually pay off, but cautions there’s usually a delay. “Over the electrification era, it took about 25 years until productivity growth numbers started to shoot up,” he said.
If China loosens up its capital account and begins investing internationally, that could also prove an important counter-balance to demographic shifts, which will lead to large numbers of retirees selling out of the market simultaneously.
Three big shifts
Capital Group International vice-chairman Michael Thawley focused his conference presentation on the main problems on the horizon, while taking pains to emphasise that, for investors, all change represents opportunity.
Thawley predicts three major shifts will impact markets. Firstly, new technologies that have disrupted familiar growth models will require dramatic restructuring of economies. Second, the global strategic balance is shifting away from the US, even as the US reassesses its role in the world; simultaneously, China is choosing to exercise its power more aggressively than expected, to achieve dominance in its region.
How we respond to these changes is complicated by the third factor: a crisis of confidence in Western industrial democracies and the rise of populist politics. “What we have is weak governments having to depend on coalitions to get legislation through their parliaments,” Thawley said.
A weak government is often a reactive government, he argued, one that deals with symptoms rather than underlying structural problems. In spite of this, Thawley anticipates governments becoming more intrusive and occupying a larger space in the economy.
That’s because, in the face of slow growth, governments will become the last resort for employment creation. At the same time, governments are under pressure to spend on social welfare, health and education. Defence budgets will probably skyrocket also, partly due to increasing tensions on the Korean Peninsula.
“In the end, that means taxes are going to go up,” Thawley said.
Despite the gloomy outlook, Thawley, like Gallmeyer, sees potential in India and Indonesia. “Those of you who go to both places will be struck by just how optimistic those countries are, and the energy that’s visible,” he said.
Despite all their challenges, Thawley is also confident about countries with strong demographics, good resources, and institutional strength. “Those are clearly, foremost, the US and Australia, the UK and Canada,” he said.
While the road ahead is messy, he predicts those places will probably be first to institute reforms that respond to the challenges of ageing populations and the new information economy.