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Central Banks Fighting Losing Battle Against Demographics

Morningstar's Bob Johnson foresees slow growth ahead as extraordinary monetary policy across the globe can't overcome working population trends.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Our Bob Johnson, director of economic analysis, thinks demographics are one of the most important drivers of the global economy. We're here to take a closer look at what they could mean for the future.

Bob, thanks for joining me.

Bob Johnson: It's great to be here today.

Glaser: Let's set the stage a little bit about what's happened with global growth over the last 50 or 60 years. How much have things really slowed down?

Johnson: They have. We used to grow, the world economy, as much as 5.5% in the decade of the '60s. And so, we had a pretty good growth rate then and that was kind of an optimum time. We'd come out of the war. Everything was kind of rebuilt, and we had kind of this wave of baby boomers around the world. So, it was a period of very high growth. And now, kind of decade-by-decade we slowly but surely declined to something around the world that looked like growth at more like 3.5%.

Now, there was a brief decade, 2000-2010, where the downward trend was broken as China kind of came out of its shell and had some pretty rapid growth and a pretty great sized population. And that kind of stopped the trend for a little bit. But now, we have kind of reverted into kind of slower GDP growth around the world again. And in terms of the U.S. data, again in the '50s and '60s the U.S. GDP grew in the levels of 3% to 4%, long-term average of about 3.1%, and now we're at something more like 2%. So, clearly, just like the rest of the world, our GDP has slowed.

Glaser: Looking at that on a per capita basis, does it look a little bit better given that population growth has slowed?

Johnson: Yeah, and I think that's an important point because growth for growth's sake is not necessarily a good thing. If we're distributing that over more and more people, that's certainly not progress. Now, in terms of what we've seen there, the per capita data shows that at one point it was growing as high as 3.5%, which didn't last for terribly long. It's slowed to as low as 1.5%. And now, over the last couple of decades, we've actually, on a world basis, come back on that front a little bit, and we're at 2.2% per capita. That means per-person data, which is an important way to look at it, because it's kind of irrelevant if we made all this new stuff but it took a lot, lot more people, we haven't really made any progress.

Glaser: And you see demographic trends as really being the biggest driver behind the slowdown, not productivity changes or technology changes or anything like that?

Johnson: No. I really do think that demographics are behind an awful lot of it. I mean, productivity can offset some factors here and there and there are a number of factors that can work to offset what's going on with population. But I really do think that the demographics are really affecting the data, not just in terms of population but just that population is getting older and spending in very different ways and saving more.

Glaser: In the face of the slowing growth we've seen global central banks really push very aggressive policies to try to restart growth to some limited success in certain places. Do you think the central banks are basically fighting a losing battle here?

Johnson: Absolutely. I think that's one of the key things that everybody has looked to the central banks because they are sort of this neutral party that's kind of a little bit more away from politics around the world. And frankly, those central banks through their interest-rate policy isn't going to be able to do it in our opinion. I think people were fooled--from time to time, the easing seems to work. One of the examples--a lot of people looked at the U.S. in kind of the 2012, '13, '14 period wherein they continued to ease, most of the rest of the world was kind of in "let's balance or budgets," and the U.S. economy emerged as one of the better performers.

Well, part of that was because we were the only ones at the time kind of really doing that in earnest and as a larger economy it certainly affects more of the rest of the world. And we saw some pretty good here in the U.S. relative to the rest of the world. But our view is that at least part of that was because of the weakening dollar. Then as the rest of the world said, "Gee, it worked so well for the U.S., we're going to do this, too." Well, then everybody was in the same boat and everybody's currencies went down and then nobody really got ahead. So, I think that's why the central bank policies haven't been terribly effective. Plus, they are fighting this battle. We're talking about demographics. There's going to be have to be other ways to fight demographic issues. More money isn't the issue.

Glaser: What would some of the policies be that could help ameliorate some of these concerns about demographics?

Johnson: Demographics are a very interesting topic, and there are a lot of different things that could probably be done to do it, most of them away from money topics. Certainly, one of the things that they could offer or happen is that you try to keep your older workers in the workforce longer. In other words, that really kind of extends your available workers and helps population growth. So, you could offer incentives for people to stay in the workforce. And on the other end, you could encourage people to either work while they are in school, more work study, internship-type programs. Maybe you do more things that get people out in the workforce quicker. Yes, education is really good, but maybe there are some people that should be in more training-oriented type programs, internship and apprentice programs out there helping the labor force sooner. So, those are things that can kind of expand the labor force issue out there. So, there are other issues. Better training is certainly an issue. We've said time and again for companies to do well, look at companies that have good training programs because those are the people that are going to do better in a world where we've got kind of a shrinking labor pool.

Glaser: What are some of the investment implications here? If you are going to see slower growth than we have now, how does that play out in terms of corporate profits, in terms of the stock market? How do you think about that?

Johnson: Well, the demographics, again, the key thing that falls out with a lot of things happen with the labor pool and certainly, with the smaller pool of available workers and we talked about trying to expand that, well, one of the issues that happens is that the corporations spend a major part of their expenses on labor. And so, as labor has become shorter, people have had to raise the price that they pay for that labor and it's certainly been one of the things that's helped limit profit growth recently. I mean, we went through 50 years between productivity and having a bigger world growth force and more imports and exports in world trade that really kept a lid on labor and really labor didn't get very much ahead for 50 years. And now, I think we've turned the corner with more labor shortages and that indeed labor may get the upper hand and we're seeing already in some of the data that labor is getting is greater percentage of GDP than they have in the past.

Glaser: That might be bad for corporate profits, but that will be money that potentially could be spent, so it could be useful elsewhere in the economy?

Johnson: Absolutely. It means that more of the spending will go in the hands of the consumer. And most economists kind of generally view that not necessarily as a great thing that it flows into the hands of consumers because they always like that business because they would buy productivity-enhancing tools, that they would spend the money right away, that they could go out and borrow better than an individual and they could leverage their spending dollars. Lately, it seems like corporations have shown more interest in buying each other and raising prices. I don't want to speak too generically. But certainly, that's been a big aspect. There certainly hasn't been a lot of spending on capital goods. So, certainly, that's been an issue. Now, maybe I believe as we flow more money to the consumer it could potentially be a good thing, despite the fact that we all talk about investment.

Glaser: Taken all together then, what do you expect U.S. growth to look like kind of in the medium term? What's your base case?

Johnson: We have brought that in over time and again, we've talked what the long-term trends are. But even kind of--I've talked about ocean liner economy for years and years and certainly back to 2010 and I talked about this 2.5% to 2% underlying growth rate. Looking at demographics and the trends we've seen recently, we think that it's more likely to be 1.5% to 2%. So, clearly, we've come down in terms of our expectations in terms of the economy and I think a lot of that's due to demographics. Again, we could do certain productivity-enhancing things, certain hiring things that might change that and certainly, forecasters have been wrong before and we'll see what happens this time around.

Glaser: Bob, thanks for your review on demographics today.

Johnson: Thank you.

Glaser: For Morningstar, I’m Jeremy Glaser. Thanks for watching.