The future in the hands of demography and crisis management

For the rest of the 21st century, productivity growth and its interaction with demographic change are the main drivers of future economic power.

A study by the National Bureau of Economic Research and developer of the Gaidar Global Model (GGM), after analysing 17 regions of the world, concludes that fiscal conditions and the issue of automation are secondary factors not only today, but in the years to come. 

China has been one of the first countries to observe how the demographic factor will be substantial in maintaining itself as an economic power, foreseeing it with its long-term projections and beginning to reverse its traditional one-child policy established in 1979 (it lasted until 2008) by gradually relaxing its strict birth control. 

In 2013, it was the arrival of Xi Jinping at the helm of the Chinese nation and the Chinese Communist Party (CCP) that transformed the vision of population growth, not only as a generator of wealth, but also of other social scales. The birth rate law was reformed to allow families to have two children and in May last year, another reform extended families to conceive up to three children. 

China aims to anticipate its ageing population. According to the Massachusetts-based agency's paper, entitled "The Future of Global Economic Power", simulations forecasting productivity growth predict that China and India will be the world's two most important economic hegemonic powers. 

"The GGM also predicts an evolving global savings glut, significant reductions in global interest rates, substantial tax increases in China and other regions due to ageing populations, and continuing differences in regions and living standards," the analysis says.

The authors of the econometric model found that, if productivity growth continues at the pace of recent years, India will account for one-third of global output in 2100 and China for one-fifth, while the United States will grow only slightly. Sub-Saharan Africa, on the other hand, will experience a remarkable rate of expansion in its share of world production. 

The GGM takes into account a number of variables such as population growth, population ageing, fiscal adjustments and automation.

From the data collected for 2017, it can be seen that the United States and China account for 16.4% and for the latter 16.7% of global GDP respectively. In that year, Western Europe, together with the UK, accounted for 17.1%.

By 2100, China and India alone will together account for 43.2% of global GDP and the United States together with Western Europe plus the United Kingdom will account for 24.2% of global GDP in that year. 

Demographics, according to the National Bureau of Economic Research, play an important and essential role in determining future economic power. 

"China's population will be, according to the UN, almost 400 million smaller in 2100, while the population of the United States will be 120 million more than its current population. In eight decades, the Chinese economy is expected to be about three times larger, rather than twice as large as it is today relative to the US economy," according to the text. 

The proportion of the US population aged 70+ increases from 10.3% in 2017 to 22.2% in 2100, and China's ageing scenario is particularly notable: the population aged 70+ will rise from 6.3% today to 25.6% by the end of the century.

In India, the over-70s represent only 3.6% of its population and by 2100 they will account for 19.5%; Brazil's case is striking, with a sharp increase in ageing from 5.4% to 27%.

What does this mean? Fiscal pressures in countries with ever-expanding elderly populations that are demanding pensions, health care and longer longevity. There will be additional pressure on public spending policies, as the ageing of large parts of the population will force taxes to rise. 

"Higher taxes, in turn, will affect labour supply through substitution effects as a disincentive and income effects because more work is needed to maintain living standards. These labour supply responses will also alter the capital demands of these regions. Ageing is therefore also important for the future course of regional GDP and thus global economic power," the paper notes.

But what will happen to the European Union? I interviewed two leading Spanish experts, Alejandro Macarrón Larumbe, coordinator of the Demographic Observatory of the SEU San Pablo University, and Antonio Pedraza, president of the Financial Commission of the General Council of Economists.

Old Europe is demographically in a trap of zero growth rates and a population of people over 70 years of age that is getting older and older. Moreover, there is a change of cycle. 

After the end of the Second World War, the Baby Boomers contributed to the reconstruction and strengthening of the European economy; they were followed by Generation X, who experienced the expansion of the middle class and access to many comforts, even going into debt beyond their means. 

On the other hand, the younger generations, such as the millennials and generation Z, suffer abrupt instabilities in the labour market with the uncertainty of not having a clear horizon, either economically or in terms of employment. They are generations that have been slow to emancipate themselves from their parents and hope to inherit from their grandparents and parents, to compensate for the narrow situation in which they live: they experience a lower capacity to save and less access to long-term debt because their own labour scenario and their precarious incomes prevent them from doing so. 

I asked Macarrón Larumbe what is happening with this binomial between demographics and savings in Spain and in Europe and he explained that: "It is interesting because we see the elderly saving more if they have a good level of income and they also consume less of almost everything; less clothes, less cars, less of everything. Here in Spain, 80% of retired people save their pension because they naturally don't need to spend so much anymore.  And it is true that for years and years here the interest rates were very low and if you are young you want to buy a house, a car and so you take out financing at 1%; on the other hand, for an older person it doesn't matter because they simply don't need it, so they will save more".  

What are the consequences of this? 

In Spain, in the last economic crisis there was unemployment, many people became unemployed, salaries went down, they lost their bonuses and companies closed down, but pensions were untouchable; in other words, we are spending more and more of our GDP on pensions and this has a damaging effect on the crisis itself.

Macarrón Larumbe adds other effects: "It also has electoral effects. Pensioners and retirees in Spain are already a quarter of the theoretical voters and they vote more than the average, they have tremendous electoral power, politicians know this; in fact, Spain is spending about 20% of what it produces to care for the elderly population".

Is there a risk that part of the millennials and generation Z will become a social burden for the state rather than a generator of savings and wealth, with more and more young people neither studying nor working, more unemployment benefits, housing subsidies and even not contributing in a stable way to their own future retirement?

That risk certainly exists... it is true that it is a problem in Spanish society: pensioners are in a fairly good situation, middle-aged people who are already established in jobs in Spain have legislation in favour of the worker who has been working for many years, so dismissal is very expensive. On the other hand, young people who are trying to enter the labour market have more difficulties for everything... the data on the age of emancipation are revealing.

The National Statistics Institute (INE) recently stated that Spain will gain 5 million inhabitants in the next 50 years, but the majority - almost all of them - will be immigrants. In this respect, the expert demographer asked for caution with these estimates, in which it will be necessary to see how the fertility and mortality rates evolve. "People do not emigrate to an ageing and stagnant country". 

"The immigration we have in Spain is very low-skilled and therefore does not perform high-productivity jobs and contributes little money in taxes and social security contributions. The average foreigner contributes less than half as much as a Spaniard. Human societies have a limited capacity to assimilate limited diversity; it is not small, but it is not unlimited either, depending on where they come from; people from Eastern Europe are no longer coming as they used to because they are developing, the flows of Latin Americans have also decreased... the immigration I see is African and Asian", comments Macarrón Larumbe with conviction.

The European Union (EU) is currently facing a scenario of stagflation and depreciation of the euro, which seems more the result of a structural problem that has worsened with each crisis and could jeopardise its future.  

Antonio Pedraza, president of the Financial Commission of the General Council of Economists, explains that the EU is having a worse time than the United States because it is more dependent on energy. 

"The measures that the central banks and the Fed are adapting are more effective in the United States than in Europe because the elements that make up core inflation have less weight than in Europe; this means that energy and food in the United States weigh much less in inflation, they weigh 30%, which is why the measures are much more effective," he points out. 

On the other hand, in Europe, continues the vice-dean of the Malaga Association of Economists, these two components have a weight of 60% in inflation and the measures are less responsive.  In the case of inflation, he believes, the structural deficiencies in the EU are being exposed.

Do all these variables of inflation and euro devaluation mean further recession for the EU?

Yes, as we can see with Germany, which is the locomotive of Europe, its economy is in a complete mess, and we don't know how it is going to recover with its dependence on imported energy. To this we have to add the political instabilities we see with France and then there is Italy... there is always a doubt about the European Union and this weakens it a lot. 

In Pedraza's view, inflation in the EU will be under control next year, which is why central banks are making their interest rate hikes. "The Americans are now expected to raise rates by another 0.75% and Europe will mimic the move. For its part, the weakness of the euro is creating inflation, which is why the European Central Bank will also be forced to raise interest rates by 0.75 points, which is a beastly amount, and this is because the weakness of the euro is importing inflation; everything that comes from outside costs us much more", he points out. The Spanish economist defines the current European situation "as the perfect storm" with many negative elements orbiting at the same time and which will become more acute in 2023 because there will be a major contraction with countries entering recession. 

What are central banks going to do, how far are they going to push the upward cycle of interest rates to control inflation knowing that by doing so they are slowing down industrial expansion and sacrificing the future?

The measures being taken by central banks is monetary policy and they have no choice but to raise interest rates. If we go to classical economic orthodoxy, interest rate hikes are good for demand-pull inflation when demand is very high; but at the moment inflation is supply-pull inflation and so rate hikes are not as effective and what they are doing is rather depressing demand further and provoking a recession so that commodity prices fall. So that global demand falls and inflation falls, of course to get there will cause a severe recession... it's going to be a bad time. 

Pedraza believes that the rising interest rate horizon will not last that long because of the same financial and social pressure they generate - there are many people in debt and paying mortgages - so in his opinion inflation will be contained next year and the rate hike will not happen beyond the fourth or fifth month. 

It seems that the EU's recovery will depend to a large extent on the United States' manoeuvres, that they stop raising rates because right now they are a hoover of European capital and savings. What does Pedraza think about it?

From his point of view, when there is a crisis, the dollar becomes a safe haven currency and when interest rates on Treasury Bonds rise so much (they are already above 4% for the ten-year bond), this causes a tremendous attraction of capital to the United States. 

"Of course it affects us Europeans, now there are other countries that are also very much affected, such as the countries indebted in dollars; for them this situation is a catastrophe: owing in dollars and at these interest rates", the economist stresses.  

In the end, this recession will end up hitting a middle class in Europe that does not want to have any more children, so as not to bear the economic burden alone, on the understanding that - since 2008 - it has been moving from a financial crisis to an economic crisis and foreseeably to another financial crisis, if the central banks do not know how to calibrate the rate hike horizon properly. This spiral affects everyone...