The end of an era?

TH noticed a piece in the Financial Times – nothing sensational, but BHP (that “big Australian” mining company) gave a profit warning based on a forecast that Chinese iron ore demand is slowing. And it occurred to Hume that that the slowing of the Chinese economy is starting to show up a fair bit in the news headlines. Indeed, Premier Wen himself recently reduced the country’s GDP economic forecast for growth in 2012 to 7.5% from 8.0%. Other forecasts for China’s growth are also much lower now than the heady days (Specie-Flow forecast is 8.5% for the next 3 years = official +1%). So what is going on here? Is this the end of an era or is it a cyclical slowdown?

Well, here is the case for a structural slowdown in two simple charts. The chart shows UN Populations statistics for the share of the population that is of working age (15-64) and older (65+). Based on the UNs analysis, the share of the working age population is set to start declining sharply as its population ages. The second chart shows that, in China there appears to be a link between variations in the working age population growth rate and variations in the trend growth rate in the economy. This is what you would expect since GDP growth numbers are not per capita nor per worker, so the more people working, the higher is GDP growth.




Such a dramatic change in demographics will have a dramatic impact on the global economy. First, it could mean that China’s importance as a driver for global growth is reduced, with adverse consequences for the Big Australian (that holds dual citizenship with the UK after its marriage to Billiton) and other companies that have a China focused business model.

Indeed, continuing our focus on demographics, check out what projected global employment figures show.  Sometime around 2018, China becomes a drag on the global employment growth – quite a reversal from the current situation in which China accounts for 10 to 15 percent of global growth.

There could be other significant implications too.  An end to those really large current account surpluses that China has generated – which could mean higher interest rates and end to the plethora of ultra cheap made in China consumer goods.

 But China is not the world’s only mega-economy. There are the major advanced economies – the US, Europe and Japan (wow, that list is enough to depress just about any economist). But there is also India, which has been waiting in the wings as the next big thing for a few years now.  Over the next few weeks, TH hopes to find time to ask the question. Is India now set to become the next big thing – and a driver of growth for the global economy?  Anyone who has been to India already knows the answer – Yes, quite possibly, but there is so much to overcome.

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