Demographics: A Different Perspective WHAT IT CONNECTS TO & INFLUENCES D: Discount rates, Debt E: Economic Growth, Efficiency, Structure M: Mortality O: Organisation Behaviour, Structure G: Geography, Geopolitics, Governance R: Robotics, Real Estate A: Asset Prices, Asset Allocation P: People, Pensions, Politics H: Heterogeneity, Households I: Inflation, Inequality, Institutions C: Consumers, Culture, Cities S: Sustainability All UN data used for this presentation comes from 2017 UN population Revision. Beyond 2015 the data include UN projections. WHO DOES IT PERTAIN TO? All the People in the world and their characteristics. From an economic perspective, we restrict attention to them as consumers and workers in the world. It affects all Income Statements & Balance sheets in the world for Individuals Households Corporates Nations EMPRES-8284 1
All population numbers in millions Super-old (80+) Age Group Fastest Growing World Population: 1970 versus 2015 483 Growth 394% 186% Share of 80+ Population 1970 (%) 2015 (%) UK 2 5 25 169 4825 129% US 2 4 Germany 2 6 2103 Japan 1 8 1385 1916 38% France 2 6 Italy 2 7 1970 2015 3682 Total Population 7349 0 14 15 64 65 79 80+ 100% Source: UN, CS, SSGA Demographics EMPRES-8183 2
Population aged 65+ per 100 population15 64 yrs. Years Children per woman % change per annum Core Demographics: World, Less & More Developed Total Fertility Rate 5.0 Population growth annual average 2.5 4.0 2.0 3.0 1.5 2.0 1.0 1.0 0.5 0.0 World More developed regions 1985 1990 2015 2020 Old Age Dependency Ratio 40.0 Less developed regions 0.0 World More developed regions 1985 1990 2015 2020 Life Expectancy at Birth 100.0 Less developed regions 30.0 20.0 10.0 80.0 60.0 40.0 20.0 0.0 Source: UN, SSGA Demographics World More developed regions 1985 2020 Less developed regions 0.0 World More developed regions 1985 1990 2015 2020 Less developed regions EMPRES-8284 3
Population aged 65+ per 100 population15 64 yrs. % p.a. Children per woman Core Demographics: G6 Developed Countries Annual Population Growth 1.5 1.0 0.5 0.0-0.5-1.0 Japan UK Italy France Germany US 1985 1990 2005 2010 2025 2030 Life Expectancy at Birth (Years) Fertility Rate (Children per Woman) 2.1 1.9 1.7 1.5 1.3 Japan UK Italy France Germany US 1985 1990 2005 2010 2025 2030 Old Age Dependency Ratio 90.0 85.0 80.0 75.0 70.0 65.0 Japan UK Italy France Germany US 1985 1990 2005 2010 2025 2030 Source: UN, SSGA Demographics 55.0 45.0 35.0 25.0 15.0 Japan UK Italy France Germany US 1990 2010 2030 EMPRES-8284 5
Population aged 65+ per 100 population15 64 yrs. % p.a. Core Demographics: EMG6 Emerging Countries EMG6 Annual Population Growth EMG6 Fertility Rate (Children per Woman) 3.00 5.00 2.00 1.00 0.00 4.00 3.00 2.00 1.00-1.00 China India Turkey Russia Mexico Brazil 1985 1990 2005 2010 2025 2030 0.00 China India Turkey Russia Mexico Brazil 1985 1990 2005 2010 2025 2030 EMG6 Life Expectancy at Birth (Years) 80.00 EMG6 Old-Age Dependency Ratio 75.00 70.00 25.00 65.00 15.00 60.00 55.00 China India Turkey Russia Mexico Brazil 5.00 China India Turkey Russia Mexico Brazil Source: UN, SSGA Demographics 1985 1990 2005 2010 2025 2030 1990 2010 2030 EMPRES-8284 6
The Demographic Manifesto (2000) Radical Policy Actions to mitigate the Ageing Time Bomb Abolish Mandatory retirement ages. Adopt Flexible retirement. Close gender gaps to better utilise female work potential Rethink & implement immigration policies Outsource and off-shore non-core jobs based on costs and benefits EMPRES-8284 7
How Increasing Longevity Affects Us All? Individuals & Families Challenge existing asset & time allocation frameworks & intergenerational dynamics Governments & Societies Policy changes in labour, education, health, pensions & social benefits necessary Asset managers, pension funds, insurance cos., banks, SWFs etc. Re-assess frameworks & assumptions. Develop new solutions for clients & new approaches to understanding longevity. Significant change in thinking and mind-set needed Source: IPE Pension Awards Speech (2013), SSGA Demographics EMPRES-8183 8
(%) (%) Labour Force Participation: 1985 & 2015 Female LFP, 1985 & 2015 60.0 55.0 50.0 46.5 51.6 54.7 49.6 48.6 48.7 57.1 56.7 54.5 45.0 40.0 35.0 30.0 41.1 33.1 39.8 France Germany Italy Japan United Kingdom 1985 2015 United States Male LFP: 1985 & 2015 80.0 75.0 70.8 69.0 70.0 65.9 65.0 60.9 60.0 68.5 58.9 78.1 70.3 74.4 76.2 68.5 69.0 Source: ILO, SSGA Demographics 55.0 France Germany Italy Japan United Kingdom 1985 2015 United States EMPRES-8284 9
Gender Differences: Participation & Income G6 Gender Labour Participation Differences 70.0 65.0 60.0 55.0 50.0 45.0 40.0 35.0 30.0 51.6 60.9 54.7 65.9 39.8 58.9 49.6 68.5 69.0 57.1 56.7 France Germany Italy Japan United Kingdom 2015 FLFP 2015 MLFP United States Ratio of Male GNI per capita to female GNI per capita 2013 in 2011 PPP 2.5 2.0 1.5 1.0 1.5 1.6 2.0 2.3 1.5 1.5 0.5 Source: ILO, World Bank, SSGA Demographics 0.0 France Germany Italy Japan UK US EMPRES-8284 10
Rising Youth Unemployment 1991 2000 2014 Global youth unemployment rate (%) 11.9 12.8 13.0 Source: ILO, UN, CS, SSGA Demographics EMPRES-8183 11
Demographic Components of GDP growth Working-age Population Growth working-age population = population aged 15 64 Labour Productivity Growth labour productivity = real GDP/hours worked Labour Utilisation Growth labour utilisation = hours worked/working-age population G6 GDP growth rate has fallen dramatically (2006 2015 relative to 1996 2005) Main cause is declining labour productivity growth. Similar across the developed & developing world Japan Real GDP growth (1996 2015): Contributions 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% US Real GDP growth (1996 2015): Contributions 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% JPLPG JPLUG JPWPAG USLPG USLUG USWPAG Source: GGDC, UN, SSGA Demographics EMPRES-8183 12
Unsustainable Fiscal Strains (Ageing Related) EU28, 2012, % of total benefits Others 3% Disability 7% Survivors 6% Family and Children 8% Unemployment 5% Sickness/ Healthcare 30% Old Age 41% In most EU countries, age related expenditures currently account for 20%+ of GDP Projected to increase in future This is unsustainable currently and in future without radical reform Source: EC, SSGA Demographics EMPRES-8183 13
Demographics & Monetary Policy My view since 2005 Effects of Interest Rates: The young: Long on human capital & short on assets. The old: long on assets & short on human capital. Monetary policy impact is different based on relative fractions of young & old Credit Restrictions The more people in the latter parts of their working lives and in retirement and the fewer the young workers the less important are credit constraints EMPRES-8284 14
Consumers: Changing Household Sizes Share by household type in percentage Share of household by size in US, 1980 versus 2016 Share of household by size in UK, 1980 versus 2016 100% 13% 11% 100% 7% 9% 80% 16% 13% 80% 16% 13% 17% 16% 16% 16% 60% 60% 40% 31% 33% 33% 34% 40% 20% 20% 23% 28% 27% 31% 0% 0% 1980 2016 1980 2016 1 2 3 4 5+ Share of household by size in Germany, 1980 versus 2016 Share of household by size in Japan, 1980 versus 2016 100% 8% 3% 100% 7% 9% 20% 80% 15% 12% 80% 13% 18% 25% 18% 60% 60% 34% 29% 40% 29% 40% 18% 17% 20% 31% 42% 20% 34% 20% 0% 0% 1980 2016 1980 2016 1 2 3 4 5+ Source: Bernstein estimates and analysis, SSGA Demographics 1 2 3 4 5+ 1 2 3 4 5+ EMPRES-8183 15
Consumer Expenditures by Generations (US): 2016 Generations: Expenditure Shares of Average Annual Consumer Expenditures Item All Consumers Birth Year of 1927 or Earlier Birth Year from 1928 1945 Birth Year 1946 1964 Birth Year 1965 1980 Food 12.6 8.8 13.2 12.0 12.9 13.0 Alcoholic Beverages.8.6.8.8.8.9 Housing 33.0 50.5 34.5 30.9 33.1 34.9 Apparel and Services 3.1 1.7 2.2 2.6 3.8 3.6 Transportation 15.8 8.9 14.3 15.9 15.4 17.3 Healthcare 8.0 14.9 14.8 9.0 6.6 5.1 Entertainment 5.1 3.5 5.1 5.1 5.3 4.8 Personal Care Products and Services 1.2 1.6 1.4 1.2 1.2 1.2 Education 2.3 b/.3 2.1 2.6 3.4 Tobacco Products and Smoking Supplies.6.2.4.6.6.6 Miscellaneous 1.7 1.2 1.9 1.9 1.7 1.1 Cash Contributions 3.6 5.0 6.3 4.4 2.8 2.1 Personal Insurance and Pensions 11.9 2.5 4.4 13.0 13.2 11.9 Birth Year 1981 Source: BLS EMPRES-8182 16
Gender Changes-marriage, Child-bearing Women getting married later Women having children later Women with higher university graduation percentages. Active decision makers. Source: OECD, CS EMPRES-8182 17
Changing Global Consumers Internet use is not just a function of age but gender, education, family background, income, nationality, wealth also come into play. Internet users among 55 74 year-olds by educational attainment level, 2013 Young Adults Enter the workforce later and start accumulating assets later Most likely live at parents house until 28 30 years old Sharing economy Young Adults Living with Parents 55 74 Year-olds High Attainment As a percentage of 55 74 year-olds in each educational attainment group Low Attainment UK 74.56 92.68 49.47 US 64.25 86.02 55.40 Germany 61.74 84.40 35.66 France 60.21 90.24 42.68 OECD 55.01 84.67 37.99 Source: OECD, ONS, US Census Bureau EMPRES-8182 18
Demographics Affects Real Estate Demand & supply Real Estate Demand factors Population growth Labour market & income/wages Household structure Rural versus Urban Credit access Stage of life cycle Real Estate Supply factors State of the economy Business Credit Geopolitics Land Infrastructure Labour supply/technology EMPRES-8284 19
G6: Population Density & Share of Cities Population Density, Largest City, Share of Cities > 1M Country Population share in cities > 1M Population Density (people per sq. km) Population of largest city France 22.58 122.01 10,843,285.00 Germany 9.66 233.58 3,563,194.00 Italy 17.74 206.71 3,717,956.00 Japan 65.66 348.25 38,001,018.00 United States 45.25 35.14 18,593,220.00 United Kingdom 28.57 269.24 10,313,307.00 Source: UN EMPRES-8284 20
EMG6: Population Density, City & Share of Cities Population Density, Largest City, Share of Cities >1M Country Population share in cities > 1M Population Density (people per sq. km) Population of largest city Brazil 39.55 24.87 21,066,245 China 23.75 146.06 23,740,778 India 14.35 440.96 25,703,168 Mexico 35.82 65.34 20,998,543 Russian Federation 20.18 8.80 12,165,704 Turkey 37.50 102.21 14,163,989 Source: UN EMPRES-8284 21
% Housing & Population Share (30 44 years) Real housing price & share of population aged 30 44, US 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 Real housing price (residential investment deflator/gdp deflator), LHS Share of population aged 30-44, RHS 0.65 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 25.5 25.0 24.5 24.0 23.5 23.0 22.5 22.0 21.5 21.0 20.5 20.0 19.5 19.0 18.5 18.0 17.5 Real housing price is the residential investment deflator divided by the GDP deflator 90 80 70 60 Homeownership rate by age: USA 50 40 30 20 10 Source: Bureau of Economic Analysis, US Census Bureau UN, CS 0 < 25 years 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+ 1982 2013 EMPRES-8183 24
Sectors Demographically Advantaged Changing consumers and workers in a global and technologically advancing world. Not just people numbers, but groups and behaviours impact these sectors. INFRASTRUCTURE NATURAL RESOURCES LEISURE & LUXURY EMERGING MARKETS PHARMA & BIOTECH FINANCIAL SERVICES EMPRES-8183 25
Pension Fund Asset Allocation Trends Pension Fund Asset Allocation (2001 versus 2016) 2001 2016 Equities (%) Bonds (%) Cash (%) Other (%) Equities (%) Bonds (%) Cash (%) Other (%) Australia 62 19 5 14 49 14 16 21 Canada 62 26 2 10 46 33 1 20 Japan 52 46 0 2 28 59 4 10 Netherlands 44 44 11 1 32 54 0 14 Switzerland 36 35 20 9 30 37 5 28 UK 67 18 5 10 47 36 1 16 US 65 28 2 5 49 22 2 27 Source: Willis Towers Watson (2017), SSGA Demographics EMPRES-8183 26
Conclusions Within economics and finance, models need to be more data adaptive rather than abstract; need for micro foundations (bottoms up) integrating with top down Understanding of demographics, behaviour, market and institutional evolution will be critical for macro economists and financial economists to understand the economy and its drivers as well as its performance Pensions strategic asset allocation and ALM must holistically take into account the macro drivers of inflation risk, interest rate risk, longevity risk and market risk Changing behaviour of consumers and workers across generations and within generations is rendering many old models invalid EMPRES-8183 27
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Biography Amlan Roy, PhD Dr Amlan Roy is the Global Chief Retirement Strategist and Senior Managing Director at SSGA since April 2017. He is an experienced Global Macro Researcher specialising in Demographics & Pensions related to Economics, Investments and Public Policy. He highlights structural issues related to gender disparity, youth unemployment, system risks due to policy interactions with ALM & SAA. He is a Senior Research Associate at LSE and Guest Finance Professor at LBS. Prior to joining SSGA, he was Head of Global Demographics & Pensions Research and Managing Director at Credit Suisse having joined there in 1998. At Credit Suisse, Amlan was a client facing Researcher presenting to clients in 25+ countries and speaking at 60+ global conferences/events. In a prior role he developed global risk and asset allocation models serving as an international expert on Financial System Architecture. His big-picture macro strategic research in Global Demographics & Pensions is used by policy makers and investors and draws on the fields of Macroeconomics, Portfolio Theory, Behavioral Economics, Statistics, Derivatives and Econometrics. Prior to joining Credit Suisse, he spent over a decade in academia with a distinguished teaching career in the US and the UK. He was UK ESRC Research Fellow, Ponders Fellow, a Boston University Doctoral Scholar and a Government of India National Scholar. Amlan has a PhD and an MA in Financial Economics from the University of Iowa, an MBA from Indian Institute of Management Ahmedabad and a BA Honours in Economics from St. Stephen's College, university of Delhi. EMPRES-8284 29
Thank You. For additional information or any questions on the information covered in today s presentation, please contact: Amlan Roy, PhD Senior Managing Director Global Chief Retirement Strategist +44 203 395 6719 amlan_roy@ssga.com www.ssga.com EMPRES-8284 30