Year 2048: Gold in 30 years!

Year 2048: Gold in 30 years!

Is the worldwide economy foreseeable between now and in 30 years time? When looking back 30 years, we didn’t foresee the Berlin Wall fall or much more what was to follow but they knew about the countdown to ageing societies, the growth potential of Asia and the evolving information and communication revolution. Specific trends and patterns give us some useful guidance about the future.

Developing markets and their challenges:
Recently developing markets have been behind the biggest economic shift. Regarding purchasing power parity, the shares were lifted by nearly 23% points to 58.7% between 1980 and 2017 due to the World Bank. China boosted its share by nearly 15% points to stand at 18.3%. India’s share is a more humble 7.2% today. No other country than China has come close to this economic achievement.
Emerging markets in the global economy are expected to increase even further while advanced economies suffer in the long shadows of financial crisis.
Most people expect the rising emerging market middle class to be the big story of the next quarter century. According to a recent report from leading US research group Brookings will over the next 17 years, 170 Million people enter the middle classes every year from emerging markets, mostly in Asia, especially China and India.
Since 1945 only about a dozen of countries have managed to break out of or avert the so-called middle-income trap, and sustain adequate economic growth for long enough to attain income per head on a par with the 35 advanced economy members of the OECD.
India can surely make a lot of economic progress and China is already a high middle-income country which needs to focus on institutional, technological and organisational reforms that help high productivity growth.

Impact of demographics:
Demographic trends will play a significant role. Economic growth is associated with growth in the working age population where a stagnant or weak working age population leads to weaker savings and investment, lacklustre stock markets and price-earnings ratios and a greater preference (by older cohorts) for income.
Nothing is assured and it all depends on many factors such as improved reproductive and general health, sustained investment in education, skill formation, strong institutions and jobs to absorb large increases in working age population which depends on labour-intensive manufacturing. This is certainly a part of the world that will merit close monitoring even though nobody can know from now how this will develop in the age of automation and artificial intelligence.
China’s age structure, by contrast, is changing faster than anywhere in the world. Its working age population is expected to fall from just over 1 billion to 794 million people by 2050 which will lower economic growth by close to 1% per year and the over-60 cohort will rise from 201 million to over 490 million people (36.5% of population). The old age dependency ratio (over 60s) will rise from 13% to 46.7% by 2050.
There are 7.7 workers to support each older citizen today but there will be only 2.1 workers by 2050 which means less than the 2.7 workers in US and much lower than the 5 workers in India.

China has banked its demographic dividend – the phase associated with falling child dependency, an expanding workforce, rising levels of consumption and savings and low levels of inflation. Now, they must emerge coping mechanisms to address very different economic and social conditions.
India’s situation is very different. Its population will overtake China’s in a few years despite its falling fertility rate which still remains almost twice of that of China. 1/3 of the population is below the age of 15 and these children grow up, will boost India’s labour force over the the next 30 years by about as much as the entire working age of Western Europe today. India’s demographic dividend is just begging to be exploited. Nevertheless, can we not be certain that India will be as successful as China.

The following points could affect India’s chances of success:
- 70% of population works in rural sector, weaker tendency of people moving to urban life than in China
- Poverty and low education attainment
- No thriving manufacturing sector nor plentiful infrastructure
- Complex labour laws
- Regulations/subsidies that depress employment
- Manufacturing and services technology environment favouring local provision of goods and services rather than foreign investment.

The following points could boost economic growth in the future:
- Government’s implemented policies to formalise the grey economy,
- Elimination of black money,
- Improving corporate and financial balance sheets
- Rolling out nationwide, efficient goods and services tax

A 30-year bond bear market:
Will ageing societies lead to inflation or deflation – a distinction with significant implications for real interest rates and investment climate. Currently these societies include Europe, US and Japan. There is the worry that they will be less dynamic, featuring weaker savings and investments, continued low inflation and persistently low levels of real interest rates. Elseways, this might be wrong since the fall in working age population in ageing societies will make skills and labour scarce which tends to be reflected in higher returns in means of wages. The era of low inflation and flat Phillips curves may be ending and therefore inflation could rise again. Age structure is likely to affect inflation and according to IMF researchers, the larger the proportion of children and older citizens the greater the probability of higher inflation since different age groups have different consumption and savings patterns which affects inflation. The age structure can also influence the bond markets with falling or low bond yields. As age structure changes again in the future, we should expect increasing inflation, pushing bond yields up. The falling and low real rates of the past 30 years may be drawing to an end.

More redistributive Western Politics:
What impact will automation and machine intelligence have? They will definitely displace more jobs than they create. In the end, though, every technology shift has delivered productivity benefits from which workers or owners of capital have benefited and jobs have been created. This time it might be different, because the main beneficiaries of new technologies are the owners of capital. We should expect that politics and policies will become increasingly redistributive to compensate or face rising social tensions which again lead to the same outcome.
How will coping mechanisms deal with widespread technological unemployment? These range from training and retraining programmes to legislation of UBI (universal basic income), already being piloted in various countries, states and cities. UBI will always be too little to make a real difference to those automated out of work, weakening the welfare system for the needy.
Investors need to observe the policy responses to automation of course since it could be financially burdensome and aggravate pressure on interest rates and credit markets. If lucky, we can look forward to higher productivity growth, creation of new occupations and employment. All this is not predictable today.

Crisis outcome:
Facing times of macroeconomic instability and geopolitical crisis will be inevitably in a world where US is retreating as a benign hegemon, where China, Russia, Iran and Turkey assert their presence, is a recipe of disorder. While Europe has survived its 1st crisis, Brexit and unresolved political and banking issues remain to be addressed.
China will have to endure a major debt- relief, bad or uncommercial debt has to be recognised, written down and paid for, regulators will need to defuse the resilient and risky funding structure of liabilities created to issue debt. The economy is likely to face a period of slow growth spilling over into commodity markets and supply chains. This will shape China for a few years. US and China will have areas of close interconnection and diplomatic infrastructure to deal with “issues”.
Another big challenge is the climate change which just like demographics requires protection mechanisms for humans at risk from drought and flooding which expose governments to financial risk. Earthquakes, hurricanes and typhoons are the main losses of insurance companies. If over time, the effects of climate change lead to stressful levels of flooding, drought and famine, migration flows could prove to be highly disruptive, politically.

Challenging Future:
All in all, we are definitely facing a challenging future with lots of uncertainties.
China may seize a commanding role on global stage but it has to manage a several serious social, economic and political issues while India has demographics on its side but economic growth could be held back by the sheer scale of change that would allow this democracy to maximise its potential. Africa’s potential for transformation is greater but the journey more tortuous.

Ageing societies worldwide, inflation and artificial intelligence remain threats to the World and adding rising geopolitical tensions, climate change and unwanted migration flows, the world could be an unstable place.

Gold may prove an effective investment for the coming decades in such an environment!
For further information please contact us through our website www.liemeta.com.cy