The Weekly Update

The main focus of investors last week was Friday’s non-farm payrolls. Employment data remains one of the strongest data points on the US economy and this month’s reading was no exception showing 242,000 jobs added in February with the unemployment rate unchanged at 4.9 percent. Partly in response to this data, over the course of the week US 10-year yield rose by 12 basis points to 1.88%. Conversely, credit performed well with the investment grade spread of BoA US Dollar Master declining 10 basis points to 195 over.  

Also in the payroll report was a modest pickup in the labour force participation rate which increased to 62.9 percent, although it remains close to historical lows. The US participation rate has fallen steadily since 2000, although the reason for people leaving the labour force are unclear. Demographics could be a driver and it may not be a coincidence that the growth rate of the working age population also peaked in 2000. In April 2000 the growth in the working age population grew at an annual rate of 2.3%, compared to the latest reading of just 0.6% annual growth. As population growth affects GDP, a slowdown in the working population is likely to affect GDP growth rates too. The peak in US GDP over the past 20 years occurred in June 2000 with the 12 month growth rate recording an impressive 5.9%; today’s number is a paltry 1.9%

Which brings us back to last week’s report where we discussed the remarkable similarity between our global growth model and the growth of Chinese imports. Most discussions about trade focus on exports, with imports tending to get less attention. However, one country’s imports is another country’s exports and so imports deserve more attention. Particularly in the case of China, where imports have declined by almost 19% over the past twelve months.

Could demographics provide the answer here too? China’s working age population, which in China is the number of workers aged 16 to 59, dropped by a record 4.87 million last year. Not only will this be a factor behind slower GDP growth, but it also would likely result in a decline in imports. Whether the decline in the working age population is enough to explain the 19% drop in imports is another question, and seems unlikely. Nevertheless, Chinese import growth has been on a declining trend since 2010, despite the near doubling in GDP per head since then (IMF USD 8,866 for 2016, USD 4,505 for 2010).

However, it is not just in China where the working population is shrinking. Japan’s working age population has been shrinking since 1995, the eurozone since 2012 and the UK at a barely positive rate of just 0.1%.With that sort of backdrop it is small wonder that global imports have been dropping for many years. It also not surprising to find that growth rates, particularly in the developed economies, have also been falling.  

More worryingly, according to the United Nations, the entire populations (not just those of working age) of 48 countries or areas in the world are expected to decrease between 2015 and 2050. With demographic trends already set in stone, it is hard to see anything but weak growth going forward, and that means interest rates and inflation are likely to remain low for several decades. In that context, long-dated investment grade bonds with yields currently around 5% look extremely compelling.