Return of Christmas past does not impend
More than 20% of the European Union’s population is at least 65 years of age. Partly because of an unprecedented aging of the EU’s slowly growing population, the average annual rate of economic growth for the EU has slowed from the 2.7% of 2004-2007 to the projected 1.2% of 2019-2020. In addition, an inevitable further aging of Europe’s population has reined in inflation expectations. The combination of sluggish growth and low inflation expectations has given rise to Europe’s extraordinarily low interest rates across the credit risk spectrum.
To assure ample financial liquidity and thereby support risk taking, European Central Bank policy has helped to steer benchmark interest rates lower. For example, from yearlong 2014 to 2019-to-date, the average 10-year sovereign government bond yields have plunged from 1.23% to -0.21% for Germany, 1.68% to 0.14% for France, and 2.89% to 1.95% for Italy. Recent 10-year yields were -0.30% for Germany, 0.02% for France, and 1.38% for Italy.
The plunge in benchmark bond yields helped to reduce euro-denominated corporate bond yields from 2014’s averages of 1.99% for investment-grade financials, 1.84% for investment-grade industrials, and 4.60% for high-yield to 2019-to-date averages of 1.05% for investment-grade financials, 0.87% for investment-grade industrials, and 3.40% for high-yield. Recent yields were 0.84% for the investment grade financials, 0.70% for investment-grade industrials, and 3.00% for high-yield.
The “Europeanisation” of U.S. demographics is not imminent. Current projections show that the percent of the U.S. population at least 65 years of age will not reach the 20% threshold until 2028. The inexorable aging of the U.S. is likely to be accompanied by a slower underlying rate of growth for U.S. business activity.
Median Age of China Nearly Equals That of U.S.
As inferred from a November 18 op-ed in the Wall Street Journal, the share of China’s population that is at least 65 years of age will not reach 20% until sometime between 2035 and 2039. By that time, China too may have difficulty realising 3% real GDP growth on a recurring basis.
The current median age of China’s population of 37 years is surprisingly close to the 38-year median age of the U.S. population and is much older than India’s 28-year median age. In addition, though the 11% of China’s population that is aged at least 65 years is well under the 16% of the U.S., both are well above India’s 6%.
As Europe and Japan make clear, unprecedented aging and meagre population growth influence business activity and financial markets considerably.
By the way, Japan’s predicament is more extreme than that of Europe. For example, though Japan’s median age matches Germany’s 47 years, the 28% of the Japanese population that is at least 65 years old is much greater than Germany’s 21% share.
Shrinking and Aging Population Trims Ratings of Eight
Japanese Banks
Lately, the investment-grade credit ratings of eight Japanese banks were lowered partly because of pressures emanating from an aging population.
According to analysts at Moody’s Investors Service, the prolonged shrinkage and aging of Japan’s population has diminished bank profitability by suppressing economic growth, keeping low interest rates extraordinarily low and reducing the demand for bank loans. Reduced profitability has adversely affected capitalisation and thereby has lessened the ability of banks to absorb future credit losses.
Fewer Young Americans Challenges Holiday Sales
Well established demographic trends weigh against the return of recurring growth for real consumer spending of 3% or faster. Some may be shocked by how the number of very young Americans shrinks as the number of very old Americans expands.