Boomers likely to trigger a Japan-type meltdown
theglobeandmail.com
An article in Wednesday's Globe said that by 2015, changing demographics will slow Canada's economic growth to less than 2 per cent a year. That's according to Global Insight (Canada) economist Wojciech Szadurski, who was quoted as saying that "Canada seems to be on the verge of economic transformation driven by demographic change. What is most striking is that employment will stop growing over the next 20 years."
You can find the story -- "Boomers may slow growth" -- by searching under the writer's name, Heather Scoffield, on globeandmail.com.
The prediction may not be as outrageous as it sounds. Heck, back in 1980, The Vapors (one-hit wonders from Guildford, England) said it first: "I'm turning Japanese." Of course, back then everyone thought that Japan was on the verge of global economic hegemony. Everyone in my class at MBA school seemed to be reading "Japan as No. 1," and there was widespread hand-wringing and gnashing of teeth over the prospect that soon Japan would own most of North America. Not only did that not happen, but the Japanese economy has been quietly circling the drain for a number of years now.
It seems like only yesterday that the Nikkei topped out at nearly 40,000 (December, 1989), but it's been only 16 years, and despite its recent rally, the Nikkei is still down more than 60 per cent from its high.
The Japanese economy has been mired in a series of recessions since those heady days, and despite the Bank of Japan cutting interest rates from 6 per cent to zero, and various administrations pumping trillions of dollars worth of stimulus into it in an effort to boost domestic demand, it has yet to fully pull out of its death spiral.
Yup, Japan has already experienced "economic transformation driven by demographic change" in spades, and we may be next.
It was Japan's aging population and their lack of consumer spending that led to Japan's economic debacle. Low consumer spending led to lower corporate profits, which meant less hiring, which led to even lower consumer demand -- the widening gyre of the vicious cycle.
Here in North America, there's been a lot of head scratching over the behaviour of the U.S. consumer. It's consumer spending that drives the U.S. economy, and while there's been a lot of chatter about how it is the housing bubble and people extracting equity from their homes to spend on consumption that has accounted for the resilience of the U.S. economy -- despite the burgeoning deficits -- there is also a huge demographic component to it.
Now, macroeconomists have been arguing forever about what makes economic growth. The classicists hold that savings and investment in productive assets create growth, while the Keynesians argue that demand drives production, which creates growth. As it happens, they're both partly right, but the real driver is at the micro level, and that is where demographics come into it.
It was the U.S. economic forecaster Harry Dent who first took notice of this phenomenon, back in 1988, when he developed the Spending Wave, an economic model that uses a 46-year lag on the birth index to predict the peak in spending of the average family. He figured that the average American marries at age 26, has a child at an average age of 28, and the average household's consumer spending peaks at age 48, just as that average child is (hopefully) moving out of the house. Kids are expensive, and the older they get, the more expensive they are. Raising that average child will cost her parents a little over $200,000 (U.S.), not counting the costs of university education. Mr. Dent even maintains that it was the huge baby boom cohort entering the work force between the ages of 19 and 22 that caused the massive inflation of the 1970s. Now that the boomers are all slowing down, of course, inflation is no longer the problem that it used to be.
The key thing is that the aging boomers, or at least, the bulk of them, are entering their peak spending years. Once past that peak, their focus will turn increasingly to squirrelling away every cent they can save to cover their retirement. They won't need to spend nearly as much, since they already have all the stuff they can possibly use, and with the kids grown up and (with luck) moved out, they won't need as big a house any more, or the minivan or SUV to take the kids to hockey practice.
When that consumer spending starts to drop off, so will corporate profits, and so will the stock market. That's what happened in Japan. Global Insight seems to think that that effect will start to bite in Canada in 2015. Harry Dent says the United States will see it starting in 2010.
Once the boomer cohort passes that spending peak, consumer spending will decline for years, and no amount of government stimulus will make up for it. That's the lesson of Japan's example, and it has serious ramifications for investors. But we've got a few years left before we all turn Japanese. Just be ready to run for the exits when it happens.
Harry Koza is senior Canadian markets analyst at Thomson Financial and a columnist for GlobeinvestorGOLD.com. |
