Monday, 21 May 2007

US economy to regain ascendancy on demographics

A shift in focus to the long term today, with emphasis on demographics.

Barron's recently interviewed Joshua Feinman, chief economist at Deutsche Asset Management. Via Yahoo! Finance:

U.S. economic growth, he says, will keep lagging other parts of the world for the next year or two. The U.S. housing market's biggest declines are in the past. And export-driven U.S. companies are in their strongest position.

Feinman also asserts that U.S. investors remain insufficiently exposed to foreign-investment opportunities. And while the global economy is outgunning the U.S. right now, changing demographic trends indicate that the U.S. could outgrow Europe and Japan over the next few decades.

Elaborating on the long-term impact from demographics:

"... The U.S. population is aging, and there is no doubt that the U.S. will have to deal with the impact of that population shift. But our working-age population is still growing. In Japan, the working-age population is declining, and in Europe, fertility rates have fallen.

"China has been in a demographic sweet spot because a rising percentage of its population is in their prime working years. They have not had too many kids and do not yet have too many elderly, helping to fuel economic success. But the party is about to end. In the next decade, China's cohort of working-age citizens will get smaller and the elderly population will rise. That means less discretionary income for consumers to spend and less economic growth. But China's economy will still grow faster than the U.S.'s because they are still catching up to wealthier Western nations."

Indeed, the whole of East Asia has a demographic problem, which Philip Bowring at IHT tries to address.

... East Asia now has the world's worst demographics. Modernization, urbanization and industrialization have seen a collapse in birth rates far more sudden than in the West, and there is scant sign that the few modest measures Asians have taken to reverse the decline have had any significant effect...

Japan, with a fertility rate stuck at 1.3 births per woman, is on track to lose half its population by 2105. Other places are even worse off. Hong Kong, at 0.9 births per woman, is at the bottom of the world fertility league. Singapore, Taiwan and South Korea all have rates marginally lower than Japan, or the worst performers in southern Europe.

Using Europe as his model, Bowring thinks state spending is a solution.

The European example shows that state spending on child support, crèches and other such programs is money well spent to ensure that there will be a younger generation large enough to support the economy and pay the pensions of the old.

That is a lesson that East Asia has yet to learn. Investment in children through government spending may provide a much better return than accumulating vast fiscal surpluses to be invested in low yielding foreign assets or unnecessary infrastructure.

Perhaps that is overly simplistic. The blog to go to for a more comprehensive look at demographic matters is demography.matters.blog, where Edward Hugh has, among others, a post on the rather special case of fertility in China.

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