About this Episode
James Pomeroy, Global Economist at HSBC, joins the Essential Podcast to discuss the economic challenges of changing populations, the effectiveness of demographics as a reliable indicator, and the economies enjoying demographic tailwinds.
The Essential Podcast from S&P Global is dedicated to sharing essential intelligence with those working in and affected by financial markets. Host Nathan Hunt focuses on those issues of immediate importance to global financial markets – macroeconomic trends, the credit cycle, climate risk, energy transition, and global trade – in interviews with subject matter experts from around the world.
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- As knowledge-workers around the world have converted to work-from-home models, the costs and challenges of large cities are being re-evaluated. What factors are driving de-urbanization, and what are the countervailing forces that may keep people in cities? Listen to Mr. Pomeroy's perspectives on the potential winners and losers in a time of de-urbanization on Rise of the Small City — The Limits of De-Urbanization, when he previously joined the Essential Podcast on Episode 14.
Nathan Hunt: Demography is destiny, or so we're told. But the exact mechanisms aren't always so clear. Destiny of what? You may ask. The question is especially pressing for financial markets where knowing the future, or at least guessing the future with a high degree of accuracy is the whole point. This is The Essential Podcast from S&P Global, my name is Nathan Hunt. Talking about demographics, what they reveal and what they mean that you might not expect, I'm joined by James Pomeroy, global economist at HSBC and a frequent writer and commentator on economics and demography. James, welcome back to The Essential Podcast.
James Pomeroy: Thanks for having me.
Nathan Hunt: Let's start with a basic question from a market perspective; why did demographics matter? Why should investors, why should asset managers care how young or old or educated a population is?
James Pomeroy: Yeah, there's a, there's a load of reasons why this matters. So you think on the very basic, the number of people there are, that's the number of potential workers, its the number of consumers, its the number of taxpayers. Now, all of these numbers are extremely important and the growth rates of different sort of cohorts of the population really will determine the growth rates we can expect in terms of jobs, in terms of spending, in terms of tax take that governments could take in the coming years. So, they're really, really valuable indicators. They're also very important because they're pretty reliable over the next decade or so, you know, how many people are alive today. You've got a pretty good sense of how many of those people are going to be alive in 10, 15 years time. And that allows you to make some relatively decent, I think. Projections about potential growth rates around how the economy is evolving in terms of the shape of the population and what that could do for demand for different industries too. So if you know that you're going to have many more older people where that's probably quite good news for healthcare industry, if you've going to have a lot more school children, then that's probably quite good news for the education industry. So these things are quite interesting to follow, but the reliability or pretty much the reliability of the data over sort of a 10-year-period makes them very, very useful for anyone in financial markets.
Nathan Hunt: You have, have talked about a tectonic shift in demographics that is taking place right now. At a high level, how are demographics shifting in different areas around the world?
James Pomeroy: Yeah. So there's a few big things that are happening. So first of all, we have this baby boom across the world about sort of 60, 70 years ago. And now what we're seeing is the, all of those people hitting retirement age. Um, and that has a massive impact on the way we think about the world demographic outlook. So, if you take the world's working age population, the growth rate of that is dropping quite quickly. So, you were up at a number around one and a half percent, 10, 15 years ago. That's now down below 1% and it's likely to keep falling. So you're talking about a scenario here where the world's sort of potential growth rate just entirely in terms of the number of working-age-people drops by sort of a percentage point over the past decade. Biggest sort of change is at the moment to, in terms of the shape of the population where you've got, um, across the developed worlds, you've got this rapid aging of the population and not enough younger people. We've got, we're living through the period at the moment of the fastest growth rate in the world of over 65s in the world that you'll ever have. That's a huge change. And those changes are really, really pronounced in various parts of the world. And in Asia, where you have got quite a lot of old populations, you've got rapid aging there in three, four, 5% annual increases in the number of people aged over 65 every single year for the next decade.You've got a huge drop-off in the number of babies being born. And those two things together are causing this big change, not just in terms of that working age or total population growth rate, but also in terms of that balance, we've got a rapid growth in pensioners and a real drop-off in the number of children in the global economy.
Nathan Hunt: One of the interesting stories of the last call it 30 years from a demographic standpoint has been the younger-working-age population in China, just being a huge factor. Are there countries now that are going to take over from China as the population begins to age in that country. Where is the next youth boom coming?
James Pomeroy: Yeah, that's a good question. And you're right that if you take a look at China's demographics over the past 20, 30 years, it's been a huge tailwind in terms of helping to lift. Great. And you've got exactly that same story now playing out in, in India, in places like Philippines and Indonesia and Vietnam, a much younger population. And this is really important because if you take somewhere like India and your modal age, or sort of most common age in India is in your early twenties, huge share of the population are under the age of 25. And if you think about going through someone's life cycle, now, when you start working be it at 16 or 20, and as you sort of keep working over the coming years, you get much more productive, you get much more useful to your employer, hopefully, and therefore you're sort of adding much more to the economy. You generally earn more money, you're more likely to spend more money and it's almost the right type of agent. And that's, what's likely to happen across a lot of these much, much younger emerging markets over the next 10 years or so is you've got people sort of moving from their teenage years or their early twenties into being late twenties and thirties in the coming decade. And that is a really, really powerful demographic tailwind for a lot of these economies and it really does help to at least theoretically help to lift potential growth rates.
Nathan Hunt: One of the challenges for countries with a younger population, a growing younger population is finding a way to guarantee employment for that population. China found a way to guarantee employment for thier relatively young population during the nineties and early aughts using some clever math around balance of payments with the U.S. Do you think India, for example, may have to look at doing the same thing?
James Pomeroy: I think it's a big, big challenge and you're right to highlight it as a risk, you know, in theory, young, fast growing populations, a great news for your economy because of these more workers, more consumers, more money being spent. But if you can't generate the jobs, then there's a big risk. The uncertainty of political instability can come with that too. And this is going to be the big challenge for these economies. Can you generate enough jobs to satisfy that, that young, fast growing population? You take someone like India and you're going to have to be talking about a number for sort of every single month the Indian economy generating 700,000 jobs, maybe every single month. Now that's difficult, even in a fast growing economy. So what you then start to think about is what, how could you create more jobs? And I think if you take somewhere like India and also not of these other, Southeast Asian economies, and also some of the Sub-Saharan African economies are very, very young populations. There's currently a lot of jobs in manufacturing and in agriculture and not an enormous amount of jobs in professional services, or even sort of retail or hospitality or the sort of sectors that employ a lot of people in the developed world. And that, that is my sort of more optimistic tilt on this is if you can start to see people's spending habits in these economies change as they get richer that can help to grow these industries that can employ a lot of people and help to create jobs. Now in cafes, in restaurants, in recreational venues, baseball stadiums, or gigs, or all of these things, actually that could create a lot of jobs and also as well as you could see whole new industries pop off in terms of e-commerce and tech sectors and all of those thing that employed a lot of people in the developed world. So the key is can you get these new industries growing quick enough to help to create enough jobs for these rapidly growing populations? And, and that's going to be a big challenge and it's much, much easier to do in those parts of the world where your underlying sort of per capita growth rates are much stronger. So your India's or your Indonesia's or your Vietnam's of the world than it is in some of the economies where were much slower growth rates at the moment.So some of those sub Saharan African economies, South Africa is a great example here and where you've got a very fast working age, population growth, but incredibly weak economic growth. And whether that economy can create enough jobs is very, very challenging. And that's why you've got a very high level of youth unemployment and that it acts as an economic headwind rather than a tailwind.
Nathan Hunt: There's this idea that demographics is destiny, but if you look only at demographics, it looks like every country in the world is demographically in bad shape. Western economies, Korea, and Japan have aging populations. That's a bad thing because they weigh on the productive workers in the economy. India and Sub-Saharan Africa to your point have young populations, but that's a bad thing because they need to find employment for all those people. Is there a Goldilocks point where a country is demographically perfect or am I thinking about this the wrong way?
James Pomeroy: There, there could be theoretically. And in an ideal world, you want your population pyramid to be nice and chunky in the middle. So you want to set have relatively small number of young people. You want to have a relatively high number of sort of middle-aged people and they want to break low, low number of older generations. But actually when you think about it over time without immigration, it's almost impossible for that pyramid to look like that because you're always going to have your peak population group sort of moving through those age groups and essentially you got the same thing happening in all these different parts of the world, where everyone's just at a different stage where their peak cohort essentially is at different points of that cycle in India, as we've said, it's in your teenage years in the U.S. Is in your late twenties and early thirties, and there's a nother sort of bump in that you're sort of fifties and sixties. In Europe it's a lot of people in their fifties today and in China, it's a similar story. So you've got all these different places. It's almost impossible to replicate. That perfect pyramid over time, but everyone almost has their period where they have that perfect pyramid and that, that perfect pyramid is upcoming in emerging markets. Just we're sort of past that in the developed world. And then you can start thinking about some of the policies and ideas you could put into place to try and make that pyramid a lot more sustainable, but I just don't think it's really plausible over a sustained period of time now to a lot of immigration.
Nathan Hunt: The rhetoric on life expectancy used to be that people living longer would act as a drag on the economy because you'd have a bunch of old retired people using up resources. I noticed in your writing, you have a different interpretation for how this has played out. How will an aging population affect say the United Kingdom where you live?
James Pomeroy: Yeah, it's going to affect things in a number of ways. So let's start with the bad news and this is the sort of more traditional bad news. As you think about the fiscal cost to governments. All degenerations generally, haven't done net negative contribution fiscally because they're generally require more healthcare expense. They're required pensions and generally pay less in terms of taxes because of being retired or, or spending less than the economy. But right now there's an interesting turn that has happened in the global economy where a lot of wealth is concentrated now amongst older generations. And some of that is because people have saved over the past few decades, but a lot of that comes down to asset prices. If you think about people who have been investing in pensions for the past 30, 40 years, or have bought property 30, 40 years ago, well, you're now pretty rich if you've managed to do either of those things. So what you've generally got in most of the developed world, at least, and you've got people retiring today who are just as wealthy or wealthier than people retiring have ever been at any point in history. Yeah, there's a question there about how, what happens to that money there? Does it mean that you have sort of older populations who spend quite a lot more than at any point in history? And actually this drag that we talk about from aging populations is much, much smaller. Then there's an idea that people spend more on home improvement or going on holiday or on leisure time in one way or another, that could be good news. Or it means actually that that money goes somewhere further down the line either it's passed on to grandchildren or to children and that then could end up on acting as a sort of an economic stimulus in the coming years, because that wealth gets put back into the economy in one way, shape or form. So their aging populations typically have bad news for the chancellor or for finance ministries across the world, but they may not necessarily be so bad in terms of sort of consumer spending today compared to at any point in history.
Nathan Hunt: The last time we spoke, we talked about de-urbanization is the lesson of COVID that we should all be moving out to a farm in Vermont. Where will people be living?
James Pomeroy: I think it's a good question. What we've seen play out in the course of the last 12 months or so is a general willingness to move out of big cities. So from New York or London, but people don't necessarily want to go and live in a, in a village. They want to still be near things. Now people want to live in towns or suburbs or smaller cities. Well, you can still have, you know, your fast enough internet speed to record a podcast or to dial into a meeting or to play video games online. You know, people want these things, but you also want it to be close to recreation. People like being near bars and restaurants, they like being near airports. So one day in the future, they can go on holiday again. All of these things people do like, and across the world at the moment, particularly the developed world, I must stress and where people are leaving bigger cities, but they're not going to villages. They're going to live in small towns and suburbs where they can still get into the office once or twice a week, but they've still got a fast enough internet, they still got all of the things they like. They can maybe afford a slightly bigger home than they could in the big city. And I think that's a trend that we thought had a fair bit of potential pre pandemic and the pandemic and the much greater emphasis on remote working really has accelerated that trend.
Nathan Hunt: From a demographic perspective, what about education? It feels like increasing your workforce is only productive if they are educated enough to perform those jobs of the future.
James Pomeroy: Yeah, that's a, that's a good question. And it comes back to what I was saying earlier about. Can you sort of create the jobs and harness this young population? And if you think about the two things here, one is the sort of evolution of the types of jobs that are going to exist in much of the emerging world. They're going to be much more sort of customer service focused they're going to be much more professional jobs, and you're going to see that as I said, the sorts of jobs that we have in the developed world become much more commonplace. In the emerging world, all of that together acts as reasons why you need to invest in education and why you need a more educated workforce in the emerging world. But that's sort of only part of the story, because you've also got now that if jobs are much more geographically mobile, in theory, I don't need to do my job being sat in London. I could be sat anywhere in the world and that means the competitors from my job aren't just people who could get into central London Monday to Friday, that people who could be sat anywhere in the world. And actually what you could see in many emerging markets. There's a lot of job opportunities in the professional services side of things open up. And actually that becomes quite an interesting part of the future of the global jobs market, but that can only happen if education rates are very, very strong. Now that means the governments in the poorest parts of the world do have a huge incentive to invest in education. But I think that's going to happen in a number of ways. One is going to be in more traditional sense in terms of investing in education and schools and teachers and training and all of those things but also investing in technology. And I think the technology's ability to provide education for young people in developed and emerging markets is absolutely incredible. If you think about it, you give someone a smartphone nowadays connected to even a 3G connection, what you can get in terms of learning a language or in terms of learning coding skills or taking a university course, now that is just possible to you now from something in your, in the palm of your hand. And I think as you get the spread of technology into the emerging world, this really could help propel education rates up quite substantially on top of it, the additional investment that happens right from government. So, I'm quite optimistic that we're going to go into a world in the, in the calming sort of decade or so where on average, the per the average person leaving schools across the world is going to be the most educated that they've ever been. And that actually creates some very interesting dynam as I said for the global labor market.
Nathan Hunt: You've written recently about households getting smaller, globally. Why is that happening? And what effect do you think that might have?
James Pomeroy: So there's a couple of things that are happening, but mostly it's people just having fewer children and that is something that's happening almost everywhere right now. If you think about in the developed world, people have stopped having as many children for quite some time. There's some of that is due to just general, sort of a downward trend has happened over time because of people not wanting to have your children, because the improvements in access to contraception or infant mortality rates pushed fertility rates much lower. But actually what's really been the case in the last 20 or 30 years in the developed world, I think is big social changes, big shifts here in terms of female participation rates and the labor force being much, much higher, but that has pushed men sort of going with that trend. You've had people getting married much later, people are having their first child much later. And both of those things are playing a big role in pulling down fertility rates in the developed world. And you've also got on top of that, a generation now who in their twenties be it in the U.S. Or the UK, or in much of the developed world who are worse off than their parents, the first time in a long time. A generation who are probably going to struggle to buy homes. They're not so financially secure enough that will, they feel like they can and should raise a family or at least a large family. And all of those economic constraints are really, really important because that does limit the number of children that people have and the pandemics only made that worse. You know, young people leaving university into the biggest recession of our lifetimes. People who graduated it into the last recession who have now gone through a second huge global recession by the time they're 30, all of this together, I think really does hold down fertility rates in the developed world and then the emerging world I think going back to what I was saying about smartphones, improving education rates, they can also help improve healthcare quality. Just the access to information and to people can really help to improve general health care quality. And that will play a role in, in improving, cutting down infant mortality rates and improving education around contraception as well. All of that together will again keep pulling down fertility rates in the emerging world. So it's not just a developed market story. I think we're going to see fewer children being born across the world and in the coming years. Now that's both interesting because that one child or fewer children means the households are going to spend their money in slightly different ways. But if you're a finance minister and looking at the future tax take of your country, well it's terrifying. If you think about the fertility rates in much of the developed world, if they drop a little bit, which is our forecast that we see fertility rates calmed down rather than rise, you could talk about the population of the UK having by the end of this century. And people say that when you say that to someone and they think that's math, but you do the math and it's really not making a huge leap. From where we are today for there to be half as many people in the UK, uh, in 80 or 90 years time, I think that the magnitudes here are so huge because of where fertility rates have got to that it's going to create an enormous challenge for the way we think about debt that governments have built up the way you think our potential growth rates, when you think about investment in education, in pensions, all of these things, because this drop in the number of children that people are having has been so severe.
Nathan Hunt: I remember reading Thomas Malthus in high school, there used to be a lot of discussion around the idea that overpopulation was going to lead to mass starvation and resource shortage. Is that still a concern or is there a perception that we can continue to accommodate growing populations in those areas of the world where the populations are growing?
James Pomeroy: Yeah, I think that's a good question. Now there's a couple of things to note. FIrstly, that the world's population is still growing, but it's growing today at the slowest rate ever. So in terms of percentage increases in the world's population, it's a slower staffer. So yeah, that makes it much easier to overcome those challenges. You only need to think about improving things a little bit more to be able to tackle that population growth. And by that, I mean, in terms of energy efficiency, in terms of service of food production, in terms of all of these things, that should be much easier today than it ever has been in the past. And we're also going through an era of this incredible productivity improvements on a whole load of commodity production, a whole loads of logistical operations that are helping to provide food and energy and all of these things to parts of the world on a scale that people may not necessarily have thought were possible. And these continued improvements in that, that side of things does make this large population much more sustainable than it was previously. Now, of course, there's another side effect there that comes in terms of climate change. And people are very concerned about that this large population economic activity continues to grow, and we see a much, much greater usage of energy that is clearly a massive concern, but at the same time, we are also seeing energy efficiency increased considerably. And if we start to see more and more investment in renewable energies as well, we could actually see that the larger population isn't necessarily this sort of end of the world type story for us in terms of climate change in terms of energy, because the science and the, and the technological developments are helping to offset that. Now that's not to say that things would be even better than that, a large population, but I think it's just worth dressing. But there's also the other side of it is, you know, going back to what I was just saying about fertility rates. We think that the world's population in total population terms probably starts peaking in about 30 years time. And it could be sooner. But it really comes down to this fertility rates story where, you know, actually the UN's assumptions that are not a projections, people make about demographics have the world's population zooming up to 10-11 billion people. And in practice, it could peak out quite a way short of that. So, yeah, there's a lot to think about the technology and the improvements in food production in energy production and energy efficiency are really, really important counterpoints to the large population. But it is also worth stressing that we do expect that global population to start dropping sooner than you might necessarily think.
Nathan Hunt: James, thank you so much for joining me again on the podcast. It is always a pleasure to have you on and to get your insights.
James Pomeroy: Thanks very much for having me always a pleasure.
Nathan Hunt: The Essential Podcast is produced by Molly Mintz with assistance from Kurt uBrger and Lundon. Lafci. At S&P Global, we accelerate progress in the markets by providing intelligence that is essential for companies, governments, and individuals to make decisions with conviction. I am Nathan Hunt. Thank you for listening.
The Essential Podcast is edited and produced by Molly Mintz.