Megatrends: the Great Moderation

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.

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.

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.

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.

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.

From a macroeconomic standpoint, these three drivers contributed to a downward trend in inflation and interest rates in advanced economies.

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.

Sources:

[1] World Population Review, worldpopulationreview.com, [accessed December 2022]