To the extent that birth postponement is a key feature of the second demographic transition, South Korea is a poster child for the phenomenon. Recently, we learned that South Korea's total fertility rate fell to an astonishing 0.78 in 2022, from 0.81 in 2021, the lowest period fertility rate on the planet. The first two charts paint a clear picture. The first shows the sustained decline in fertility rates, which began in the 1960s. In 1960, South Korean women were having about six children per women, a number which had declined to just over four by 1970 and just over two by 1980. By the middle of the 1980s, fertility fell below the replacement level, and the decline has continued since, despite temporary rebounds at the start of the 1990s and again at the beginning of the 2000s. Period fertility resumed its decline around 2015, and the result to date is that South Korea has the lowest recorded total fertility rate on earth. The second chart plots crude birth rate across age and 20-year time periods, which is a good way to distinguish between quantum and tempo effects.
Read MoreI think Simon Ward is right to predict that a downturn in investment will be the next shoe to drop in developed market business cycles, even as easing inflation offers respite for households’ inflation-adjusted disposable income and spending. This has been a key theme for me and my colleagues at Pantheon Macroeconomics for a while. In the U.S., Ian Shepherdson believes that this will drive the economy into a mild recession, while we are a bit more sanguine in Europe for the simple reason that the euro area economy effectively has been close to recession since the end of last year. Simon Ward notes that the capital goods component of the global PMI hit a new low in April, that inflation-adjusted profits in G7 slowed sharply last year, and that nominal money is contracting. Crucially, he adds that credit standards are now tightening significantly in Europe, as well as across the pond. Flat-lining profits in inflation-adjusted terms, a contraction in nominal deposits, the lagged effect of higher interest rates and tightening credit standards is bad news for private capex, including inventories, as measured by the national accounts. The silver lining is that a slowdown in investment should, combined with softening inflation, persuade DM central banks to kick back from the table on rate hikes. The key question, however, remains whether a slowdown in investment and aggregate demand is adequately priced-in by equities. I doubt it.
Read MoreCentral bank hiking cycles in the developed world are slowly but surely coming to an end, raising the question of whether they have pulled off a soft landing, defined as a fall in inflation back towards target of around 2% without a meaningful decline in output and rising unemployment. On the face of it, the answer to this question is a resounding no. Interest rates in Europe, the UK and the US are up anywhere from 300 to 450bp in less than a year, driving up bond yields , and pushing yield curve inversions to near record levels. Anyone using these data points to predict what comes next, using historical relationships, will conclude that the wheels are about to come off in developed economies and their financials markets alike. The difficulties in the US regional banking sector is, in this case, simply a canary in the coal mine, warning of bigger shocks to come. The investment implications of such a view are simple; short equities and long short-term government bonds.
Read MoreI am currently writing the third chapter on fertility for my book on demographics—see here— which focuses on on the onset of sub-replacement fertility in one country after the other since the 1970s, what's driving this shift, and whether the decline—to a large extent driven by birth postponement or so-called tempo effects—is reversing or accelerating. It is a treatise on the notion of a second demographic transition, including empirical case studies, and a discussion about whether sub-replacement fertility is something to worry about, cherish, or perhaps to approach with indifference. This is an enquiry that is defined just as much by what it excludes as what it includes. Once we dip into the multidisciplinary academic work on demographics which has emerged in the last two-to-three decades, we go from a large literature to an almost unmanageable one. I will hopefully be able to present a first draft on the chapter soon. In the mean time, however, one thing that as struck me during my recent work is that global fertility will soon fall below the replacement level, defined as just over two children per women, despite what the latest UN projections would have you believe.
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