Readers will remember that here at Stratton Street, demographics are of key interest to us. So much so, that when combined with our Net Foreign Asset “NFA” analysis and Relative Value Model “RVM”, we launched a fund to allow us to take advantage of those countries with improving NFA positions and growing populations and avoid deteriorating NFA positions and shrinking populations.
Moody’s Investor Service recently published a research piece looking at the ageing related credit pressures on Sovereigns in advanced economies. Clearly demographic timescales work on a different basis to the usual hustle and bustle of a typical trading day but it’s good to know the direction the super tanker is taking and where any potential icebergs may be hiding.
Their analysis suggests that pressures will be greatest in five sovereigns (absent any mitigating measures such pension sustainability or healthcare reform) who will face acute growth pressures unless productivity growth accelerates out of a group of twelve nations that were focussed on as either the most aged, or those that will experience the fastest ageing over the next 15 years. Whilst Japan, Greece, Portugal and Spain will be affected from the early 2030s, Italy will face significant headwinds from the mid-2020s.
· Additionally, ageing will contribute to large increases in public debt burdens in Italy and Japan and to a lesser extent in Spain and Greece.
· Germany, Spain, Italy, Portugal, Japan and Greece all see marked slowdowns in per-capita income growth through much of the 2020s and 2030s, likely further constraining governments’ capacity to mitigate the fiscal impact of ageing.
· Many governments have introduced measures to boost labour supply, and funding greater technological investment which they consider unlikely to fully offset the impact of shrinking populations.
· Additionally, while greater female or older workers hold more potential than immigration to mitigate the impact of population ageing on labour availability, they believe this may only reduce and not offset the drag on labour growth. In Poland, shorter life expectancy is likely to constrain any increases in old-age labour force participation.
· Immigration can partly offset declining labour contributions, but is clearly politically sensitive. Switzerland, Belgium, Austria and the Netherlands are mentioned where net immigration to may offset shrinking populations. Portugal, Greece, Poland and Japan were the other end of that scale.
We will continue with our thoughts tomorrow.