USA Megatrends: the Great Moderation
Favourable demographics, rapid urbanisation and globalisation powered the global economy between 1980-2020. This enabled Western firms to reduce their production costs and increase profits. But looking forward, we believe the next decade will be driven by very different forces.
1980-2020 was a golden period for the global economy. Global economic growth was strong, while interest rates and inflation fell sharply in advanced economies. Despite a few blips along the way, including the global financial crisis (GFC), this forty-year period fares well when compared to others in recent centuries. In our view, there were three main drivers of this.
1) Favourable demographics
First, we saw a prolonged period of favourable demographic trends. Most importantly, the global population exploded. Between 1980 and 2020, the global population increased by 3.4 billion (75%), leading to a monumental increase in the supply of workers.
The composition of the global population also changed. The global working age population ratio, which calculates the number of people between the age of 15 and 64 as a share of the total population, increased from around 59% to 65%. This increased the number of workers in the economy relative to the number of dependents. Notably, China experienced a particularly sharp increase in its working-age population, which was a major driver behind the global figure.
We also saw a series of structural changes take place in the global economy, for example:
The rapid integration of China into the global economy
The integration of Eastern Europe after the fall of the Berlin Wall
Baby boomers joining the workforce
A rise in the number of women in employment
However, looking at the latest data on demographics, it seems that this tailwind behind the global economy now looks to be turning in the opposite direction.
2) Rapid urbanisation
The second driver of the Great Moderation period was urbanisation — the movement of workers from rural regions into cities. Again, this was largely driven by China.
Take Shenzhen, for example. In 1955 it was a small fishing village of 5,000 people. By 1985 it had steadily grown to a population of 175,000 people. Over the next 35 years it transformed into a megacity of 12.5 million.
And it wasn’t just Shenzhen that experienced major transformation. China now has 17 cities with a population over 5 million people[1]. The economic impact of this rapid urbanisation has been huge — it kept the price of Chinese manufactured goods low, while also powering Chinese and global economic growth.
But falling population growth means that this rapid movement of Chinese workers is starting to slow. While urbanisation will continue to increase in some economies, it’s set to decelerate at the global level.
3) Globalisation
The third driver of the Great Moderation period was globalisation. The chart below looks at global trade openness, which is a widely used measure of globalisation. The 1980s up to the GFC was the standout period. In particular, after the fall of the Berlin Wall, globalisation accelerated as firms looked to exploit new sources of cheap labour in China and Eastern Europe. However, global trade never resumed its upward march in the years following the GFC.
Then in 2020, Covid-19 highlighted the risks associated with having highly integrated supply chains. In 2022 the Russia-Ukraine war again highlighted the weaknesses of overreliance on a limited supplier base. It seems that globalisation has stalled for the time being.
The economic impact of these three drivers was substantial.
1. Favourable demographics greatly expanded the global supply of labour
2. The migration of workers from rural regions into cities meant that economies, such as China’s, were able to manufacture goods at very low-cost levels
3. Globalisation enabled Western firms to exploit these lower labour costs to import cheap goods from Asia and Eastern Europe. This allowed firms to reduce their costs and increase profits
From a macroeconomic standpoint, these three drivers contributed to a downward trend in inflation and interest rates in advanced economies.
The next decade will look very different
We are now at an inflection point. The forces that shaped the past forty years are shifting in different directions. New technologies will be required to sustain human process. We think that the next 10 years will look different to recent decades. It will be shaped by four global megatrends.
For more of our research on the next decade visit our megatrends hub.
Sources:
[1] World Population Review, worldpopulationreview.com, [accessed December 2022]
Important information
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. Details correct at time of writing.
