Tuesday, August 21, 2018

Global Economy On Precipice of Secular Decline...Detailed via Shifting Population, Demographics, Income, and Energy Consumption

Many look at global population growth as a given to greater consumption...and looking at the chart below of total global population set to hit 7.8 billion by 2020, one might be forgiven for this viewpoint.  However, the reality, when one looks into the numbers, is that growth in global consumption has ended, as I recently detailed, "Investing for the "Long Run"? You May Want to Consider This".  Today's article explains why this population growth will no longer equate to economic or consumptive growth.

Global Births & Distribution by National Income
The inexorable decline in fertility rates across the world, not just in the wealthier nations, is the central feature of a maturing world.  The chart below shows the declining fertility rates from high income to low income countries (more on this below).  It is the leadership and electorates of the world that are immature and will not accept that a finite world cannot continue to financially and economically grow at a rate far in advance of its population and their incomes.  The declining fertility rates coupled with increased lifespans have resulted in a significantly larger total population, which is living decades longer, producing essentially the same total number of children as two and three decades ago.
Globally, births have stalled since peaking in the '85 to '90 period, only just returning to that previous high water mark in the '10 to '15 period (as the chart below details, showing total births per five year periods).  The estimates going forward are the UN medium and low variants, but reality is likely to between those estimates, with total births significantly declining.
Below, the distribution and changing quantity of births (per five year periods) from 1950 through 2050 by high income (black line...$12,000+ income per capita including the US/Canada, most of Europe, Japan, Aus/NZ, etc.), upper middle (yellow line...$12,000 to $4,000 per capita income including China, Russia, Brazil, Turkey, Mexico, Thailand, Columbia, etc.), lower middle (red line...$4,000 to $1,000 per capita income including India, Indonesia, Pakistan, Bangladesh, Ukraine, Philippines, Egypt, etc.), and low income nations (blue line...less than $1,000 in per capita income including most of sub-Saharan Africa, Afghanistan, Haiti, etc.).  Future estimates below are based on UN medium variant forecasts and almost surely overstate future births. 
  • Births among High Income nations peaked prior to 1965 and have been declining since.  Births are down 20% since that peak, at approximately 65 million in the current five year period from 2015 to 2020.  The UN medium variant estimates births will stabilize at this level, but given a shrinking child bearing population and continued declines in fertility rates, further declines are more likely.
  • Births among Upper Middle income nations peaked prior to 1990 and have declined by 30% or over 70 million (per five years) since that peak.  The UN estimates continued declining births, but the probability of far larger declines is a good bet.
  • Births among the Lower Middle income nations are estimated to peak and stall at these levels.
  • All current and estimated future global growth in births is among the Lowest income nations of the world.

0 to 64 year old Global Population
Given the trend to declining births began a half century ago in high and upper middle income countries, this has now fed through to the 0 to 64 year old global population which is about 7 billion persons as of 2018.  The simple takeaway should be that the 0 to 64 year old populations (as well as the child bearing populations) among the high and upper middle income countries have ceased growing and will now be shrinking, indefinitely.  All 0-64 year old population growth from now forward will be among the lower middle and low income nations of the world.  So what?

Income by Age of Head of Household

Why the focus on 0 to 64 year old populations?  Average income and expenditures vary greatly by the age of the head of household, not to mention labor force participation rates.  As one might expect, income / expenditures and labor force participation rates start low, rise through peak earnings years (45 to 54 years old), and then recede in later life (earnings more than halved, expenditures roughly halved, and labor force participation rates down 90% by the time the head of household is 75 years old).  So when I show that all population growth is among the 65+ year old population in the high income nations and will soon be the same among the upper middle income nations...this really matters.
Gross National Income Groupings
But first, putting the four groups relative income and per capita income in perspective (using World Bank Atlas method, detailed HERE).  The chart below shows the gross national income, by the same groupings.  The high income nations represent 64% of global income and the upper middle income nations another 27% while the lower middle and low income nations represent less than 9%, combined.  Not coincidentally, these breakdowns of global income, per group, line up very closely with the percentage of global energy consumed (and more broadly, global commodity consumption) by each group.

And looking at income per capita of the same groupings in the chart below (again using World Bank Atlas method).  Relative to the average per capita income of high income nations, the average income in the upper middle nations is 20% of that in the high income nations, lower middle nations earn just 5% relative to the average high income per capita, and residents of low income nations earn less than 2%.  This is to say, to simply maintain current global economic activity, for the decline of every one, 0 to 64 year old person in the high income nations, it takes the growth of 20 persons in the lower middle nations or growth of 50 persons in the low income nations!!!  But then add in the imminent large scale declines among the upper middle income nations, and the bottom falls out.

Since all the global 0 to 64 year old population growth is among the lower middle and low income nations, a closer look at their situation is merited.  In short, it ain't good.  After rocketing higher from 2002 until 2014, the situation is really deteriorating as the growth of the high and upper middle income nations breaks down...without the growing wealthier markets to export to or wealthier nations in need of greater capacity in low cost countries, the engine is stalling in the poorer nations of the world.
Total Energy Consumption, by Group
Thanks to the EIA, we can see the total primary energy consumption by each income group (all energy consumed; including coal, oil, natural gas, renewables, etc.).  The 2007 energy consumption peak, and secular decline since, among the high income nations very much mirrors the changing under 65 year old population.  Likewise, the upper middle income nations energy consumption has stalled, just as one might expect, following the like stall in their under 65yr/old population.  The population and energy consumption dual rollovers, just like in the high income nations, looks to be underway.  The secular downturn in energy consumption among the upper middle income nations is imminent.  These slowdowns are sending shivers across the lower middle and low income nations of the world, that absent the wealthier nations growth, are likewise stalling.
65-74 year old and 75+ year old Populations
Below, a focus on the population of high income countries that are growing...the 65+ year old segment.  By 2035, the 65-74yr/old population essentially peaks and begins to decline leaving all population growth solely among the 75+ year olds...the segment with the lowest earnings and spending habits (not to mention taking large withdrawals from unfunded liabilities alongside massively underfunded pensions).

Below, the upper middle income countries, and the 65-74 year old population peaks in 2040, and then all growth is solely among the 75+ year olds.

Gross National Income, Inclusive of Demographic Shift by Head of Household
Putting it all together.  The chart below shows global gross national income (using the World Bank Atlas method), with the contribution from each grouping of nations.  However, I take the historic and current income per capita of each grouping and multiply by 110% among the 0 to 64 year old population, multiply by 70% among the 65-74 year olds, and by 50% among the 75+ year olds.  Historically, the chart matches almost 1:1.  However, looking forward, the outcome is that the shrinking #'s of 0 to 64 year olds in the high and upper middle income nations essentially offset the rising #'s in 65+ year olds and broad rising #'s among the lower middle and low income nations.  In a world premised on perpetual growth, the best case scenario is essentially a stalemate.
For those curious to see the individual groupings.  First, high income nations population and demographic shifts followed by changes to potential income, below.  Extremely noteworthy for the high income nations is that nearly all population growth going forward is solely among the 75+ year olds versus declines in all age groups except the 65 to 74 year olds.

An aside on the US.  Public debt has exploded since the year over year population growth among the 15 to 64 year old population peaked in 1998 and has decelerated by over 80%...while federal debt (particularly marketable Public debt has exploded while surplus trust funds feeding the Intra-Governmental debt is falling fast).  What is to come from a population perspective suggests public debt is set to explode.
Upper middle income nations, below.  The upper middle income nations child bearing population is falling fast, while the growth among 45 to 64 year olds is decelerating.  The shift to growth solely among the  65+ year old set is just a matter of time.

An aside for China...of course, China is the driving force behind the middle upper income nations.  But, decades of declining births, a falling childbearing population, and failed attempts to turn this around (detailed HERE and HERE) mean a secular downturn in demand is underway in China but more broadly across East Asia.  Couple this with a falling base of importer nations, and domestic plus international demand will fall indefinitely from here.  Falling core populations, decelerating and declining energy consumption, and falling economic activity all go hand in hand (detailed HERE and HERE).
The East Asia (China, Japan, Taiwan, Korea(s), Mongolia) childbearing population and births among them are falling fast (chart below).  A fast falling childbearing population since 2007 (yellow line below) with continued deeply negative fertility rates equals a continued collapse in births.  The blue line represents births (per 5 years) plus the UN medium variant (dark blue line) and low variant (green line).  The collapse in births is already a given, the only question remaining is how long can a region continue economically, socially, and financially when it produces so few children?
Lower middle income nations population and demographics, below.

And finally, low income nations shifting population and demographics.

Of course, if per capita incomes reversed their current trajectories, this would change the math significantly.  But when you have a declining base of consumption among those with all the means to do so and growth among those with little or essentially no means... this is the most deflationary case possible.  Rising wages in the face of declining demand and consumption seems unlikely.  Growth has ended and decline will be the central feature for decades, if not centuries.  How we decide to handle this new reality will determine the financial and economic systems.  The issue the world will not face will be resource depletion (at least not in the short run), instead the world is faced with how to deal with the growing inequality among (and within) nations, resultant overcapacity, ongoing urbanization versus large scale rural depopulation, and a general bankruptcy / reorganization of all the promises made that required perpetual growth to make them come true.