The New Big Five

“The future ain’t what it used to be,” baseball great and father of dozens of quirky quotes Yogi Berra once mused. He wasn’t the first to raise this point.

Back in 1937, French poet and philosopher Paul Valéry wrote: “The future, like everything else, is no longer quite what it used to be. By that I mean we can no longer think of it with any confidence in our inductions.”

Valéry’s quote comes from a truly unsettled time of global economic depression and the rise of belligerent dictatorships across Europe. Things are very different today, but we are witnessing profound physical, political, social and economic changes. The future is indeed quite different from what we might have imagined a few years ago.

That is partly because recent history – the period that roughly falls between the collapse of the Berlin Wall in 1989 and Covid in 2020 – can be thought of as a golden age of globalisation, when capitalism and democracy seemed to march across the globe under the American security blanket. From this perspective, the future looks particularly daunting. However, someone who grew up in the chaotic first half of the 20th century, for instance, would never take progress for granted. Nonetheless, there are big shifts underway with unpredictable outcomes. Today we look at five of the most important trends that take us into unchartered waters.

Demographics
For most of human history, there was very little economic growth since there were few productivity enhancements. To increase output, you had to increase inputs – land and labour. The Industrial Revolution was a productivity revolution that continues to this day. Advances in medical care also saw a global population explosion. The combination of growing labour forces and rising productivity means today we take economic growth for granted, something an ancestor from 500 years ago would never do.

Today, however, populations are shrinking in several major economies, including Japan, China, Korea and much of Europe, as fertility rates have fallen below the replacement level of 2.1 children per woman in these countries. Fertility rates in the US are also low at 1.7, and population growth is almost entirely due to immigration. This lack of population expansion upends the economic growth story of the past 300-odd years. Growing populations need more homes, furniture, schools, cars, groceries etc. Shrinking populations, however, need fewer.

Shrinking populations also mean fewer workers. Though people are also living longer, extending the retirement age is often a fight. Therefore, many rich countries (and China) face a situation where the number of retirees is ballooning relative to the number of workers. In countries where social security systems are pay-as-you-go, in other words current pensions are funded by current tax revenues and not accumulated savings, this is clearly a problem.

There is one region where population growth continues apace. The average fertility rate in sub-Saharan Africa is still 4.6, Africa’s population is projected to double between now and 2050 according to modelling by the United Nations (long-term demographic projections are usually much more accurate than any other form of forecasting).


In other words, Africa will provide the world’s workers over the coming decades. But what we don’t know is whether Africa can provide enough jobs in a continent already struggling with unemployment. In the 18th and 19th centuries, Europe transplanted its surplus population to the Americas, Australasia and elsewhere. It is not clear whether other countries will accept millions of migrants from Africa as immigration politics have become toxic in the rich countries.

Chart 1: Working age population projections

Source: United Nations

Africa’s young and growing population therefore offers both promise and peril. It is potentially a huge consumer market that South African firms can tap into, but it also faces possible further destabilisation as it struggles to accommodate another billion people.

Debt
The second big trend is debt. The world has more debt now than ever before, and it is only rising. According to the International Monetary Fund, global debt reached 238% of total global income (GDP) in 2022. Of this, government debt is 92%, household debt 55% and non-financial corporate debt 91%.

Now on one level, this shouldn’t be too alarming. One person’s debt is another’s asset, so record debt levels are implicitly also linked to record wealth levels. The problem is that debt can be destabilising and that high debt levels can also weigh on economic activity.

The type of debt also matters. Governments have more capacity to service debt than private entities since they can expropriate resources from the private sector, but only when they borrow in their own currency.

The worst kind of debt is tied to speculative activity, notably associated with property booms when households, banks and developers gear up. If property values then fall, balance sheets become impaired (asset values decline but liabilities remain unchanged), gumming up economic activity. In the end, there are usually large write offs and sometimes the government has to carry the can. We’re in the early stage of something like this happening in China.

Elsewhere, however, there are few signs of excessive household gearing, while banks also generally seem in good shape, thanks to strict post-2008 regulations.

But perhaps the biggest question of the moment concerns US government debt. US government debt is already close to 100% of GDP (depending how you measure it) but more worryingly, is likely to keep rising, despite the current strong economy. Based on current legislated budget priorities, the US will run an annual deficit of around 6% of GDP for the next decade according to the nonpartisan Congressional Budget Office. There is simply no political will in Washington to arrest this trend, and the upcoming elections are unlikely to result in a change in direction.

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