ALPHA SOURCES 4 | Paty ‘ Ni ie “yl iALPHA SOURCES IT’S THE FERTILITY, STUPID even years ago I did a thesis Jon demographics and capital flows, which informs my think- ing on economics and finance to this day. That's a long time ago, though, so I thought that I would provide an update on one of the key pillars of that work. It starts with ageing. The breadth and speed of population ageing currently sweeping the global economy is unprecedented in human history. It is partly driven by rising life expectancy, which we can crudely hold to be a linear function of economic development. But it is also a result of a com- plex fertility transition. Two stylised facts should be highlighted at the 2 outset. Firstly, the demographic transition does not end with a homeostatic “equilibrium” of re- placement level fertility. Secondly, the decline in fertility seems to be driven by two forces; the quantum effect which oper- ates on a quantity/quality trade-off and the tempo effect, which is the phenomenon of “missing births” as women postpone having their first child. The two are connected in complex ways, that we probably don't quite understand. My goal here is to understand what is happening to global ferti- ity rates. My sample is the World Bank's data and their estimates of total fertility rates across countries. es Se Sacha comALPHA SOURCES ‘THE TRAPPED ONES I start with those who are in a hole. The literature talks about a. fertility trap, which kicks in once fertility slips below 1.5. The idea is that countries with fertility this low might not see a recovery in birth rates, ever. The idea of a fertility trap effectively is an attempt to explain something which shouldn't happen. Even if assume a strong tempo effect where increased education and labour force par- ticipation of women lead to birth postponement, fertility should rebound, eventually. Unfortunately, this is not always the case. The first chart below shows countries, where total fertility rates averaged less than 1.5 between 2010 and 2015. The second chart shows the change in fertility be- tween 1994-to-2004 and 2005-to- 2015. In a world of strong fertility “catch-up,” births should be rising, but they aren't. Indeed, in many countries fertility is still falling; this is, quite frankly, extraordinary. Looking at the countries on this list tells you a lot about the global economy. A few obvious condlu- sions stand out. Eastern Europe has managed the feat of becoming old before it got rich. The good news is that many eastern European economies are now ob- serving a modest rise in fertility. Japan and Germany appear stuck with ultra-low fertility. I think this has implications for these econo- mies’ ability to conform to the world’s expectations of domestical- ly demand-driven growth. In other words; it likely won't happen. With the exception of France, all the major Eurozone economies are stuck with low fertility. Perhaps, the idea of a common currency and monetary policy isn’t so far fetched after all? Hong Kong, Singapore and Korea have freakishly low fertility, which chimes with the idea that these economies need external demand to maintain their particular models, of economic growth. fig. 01 / Those who are lost — fig. 02 / A fertility trap? Ura ty age, serge TR <1 fornia © ea ety sn args TR is 104 2 2 205 “ ?. cp ee ? * LPpL Y) ie MELON G ANGI G SEYLUM GING HY ¢ é ¢ 3 es Se tS Gehan comALPHA SOURCES ‘THE BORDERLINE COUNTRIES The borderline countries have below replacement level but have not yet slipped into the fertility trap. We should distinguish be- tween two groups of countries. Countries, where fertility is still falling are probably “in transition;” they are at risk of falling into the fertility trap. Countries where fertil- ity is stable or rising suggest that they have turned a corner. The key country in this sample is China, where the average fertility rate between 2010 and 2015 was 1.6. China's one-child policy means that the biggest economy in the world is ageing at a startling pace. Understanding what this means for China is probably the single most important question in global mac- roeconomics today. A lot of hope is pinned on the idea of rebalanc- ing in China, But I fear that it will difficult for the China to live up to these lofty expectations. ‘The good news is that Chinese fertility is no longer falling, and the ‘one-child policy has been abolished. The second chart shows that China is one of the countries in this group, where fertility has ‘increased slightly in the last de- cade. It won't matter for the pace of ageing in the near term, but it suggests that China is not slipping into a fertility trap. Other countries of note here include Lebanon and Iran, where fertility is still falling rapidly. If this continues, the Middle East will have at least two countries with super low fertility soon. Itis also worth pointing out that some countries in Eastern Europe appear to be fighting the region’s ‘overall fertility deciine. Indeed, fertility even seems to have turned a corner in Russia. Finally, I think itis fascinating to see that fertility rates in Thailand and Brazil are still falling rapidly, despite already low birth rates. We reflect on these two countries as ‘emerging markets, but this is be- ginning to look like a false label. fig. 03 / Low, but not trapped — fig. 04 / Many are still in transition 1 eben conte, erage TR ti 1S nf 04 2 uw os CULL lf dd 4 Te bret curt dung TR fam 4452009 202018 & GEPIL LY YigT tile - 7 es Se tS Gehan comALPHA SOURCES ‘THE BALANCED COUNTRIES ‘As we leave those with low fertil- ity, we bump into the group of countries that, at least in a theo- retical sense, are “just right” with a fertility rate between 1.8 and 2.19. “Just right,” though, is a misnomer. Arguably, the fertility transition will never end as such. But itis inter- esting to ask whether some coun- tries can remain dose to replace- ment level fertility rates. These countries should show up in the second chart below as those with litle or no change in fertility in the period from 1994-to-2004 to 2005-to-2015. The key group here is the big ‘Anglo-Saxon countries; They all have fertility rates slightly below replacement levels, and birthrates appear stable with the notable ex- ception of the U.S,, where fertility seems to have slipped in the past five years. In the U.K. and Austra- tla, though, fertility was higher in the period 2005-to-2015, than in the decade before. The same is the case in New Zealand Interestingly, Canada has been left behind with fertility rates closer to EU levels. Contrasting this result with the cluster of Asian and European countries with low fertility tells you a lot about global growth and capi- tal flow dynamics. Rapidly ageing economies with high debt levels won't run large external deficits. But they will happily finance those more balanced—in a demographic sense—countries that do. Finally, the balanced group of economies also include so-called emerging economies, which appear to be passing through on their way to lower fertility. The most prominent are Chile, Colombia, Turkey, and Malaysia. Finally, we have to mention France which is the key outlier here. Fertility has rebounded to close to replacement level and is still rising. Indeed, France is one of the only OECD economies, which has managed to turn its demographic transition around. fig. 05 / Just right? — fig. 06 / On the look-out for equilibrium ou 02 2 a0 a0 Mt LOOGUOE GY MAY ¢ es Se tS Gehan comALPHA SOURCES ‘THE DIVIDEND ECONOMIES Looking beyond the countries with near replacement level fertility, the grouping of countries according to fertility becomes even more arbitrary. I have chosen a group with fertility rates between 2.2 and 3.9 from 2010-to-2015 because they should include countries that are enjoying their demographic dividend. The demographic dividend is a catch-all concept for the period in the overall transition when the working-age population grows faster than those dependent on it. In other words, it is a golden ‘opportunity for countries to lock in a favourable long-term develop- ment path. The clue is in the word, though; itis just an opportunity. The first chart below shows the countries which ougth to be enjoying the spoils of the dividend. A quick glance, however, shows that the demographic dividend is no guarantee of a resilient econo- my, let alone stable asset markets. rn Venezuela probably is the best example. It might have demo- graphics on its side, but the econ- ‘omy’s institutions are in disarray. Zimbabwe and Haiti are two other countries, where bad institutions are swapming the impetus from positive demographics. In coun- tries with unstable institutions, a large and growing working-age population even is a disadvantage to the extent that the economy isn’t generating jobs enough to employ its workers. The good news is that if we sift through the list, we find some positive DD stories. India, Mexico, Peru, Indonesia and The Phillip- pines stand out as the most promi- nent EM investor darlings that are currently enjoying their demo- graphic dividends. Finally, itis worth highlighting Israel for its rather peculiar fertil~ ity regime. It is a highly developed economy, but it appears to have a stable fertility rate of just under 3, which is unprecedented. fig. 07 / Some gems in between? — fig. 08 / The ongoing transition os as OPO LUORLIDGO! — PPL ZORLE LLLP 6 es Se tS Gehan comALPHA SOURCES THOSE WHO HAVEN'T STARTED The final group of countries is those with fertility rates above 4.0. Countries in sub-Saharan Africa feature prominently on this list. The positive spin here is that fertility is falling rapidly in most of these countries. As a result, they soon will be moving through the demographic dividend. The nega- tive counterpoint, though, is that it won't matter unless the institu- tional backdrop improves, which is a long shot in most cases. I would be hard-pressed to find any countries on this list with a bright outlook. Some also look like they are stuck in the poverty trap. In countries such as Niger and Congo, fertility is only falling slowly, which suggests that have not yet started their demographic transition. Child mortality in these countries also remains high, which signals thst the turnover of human life is depressingly high. It likely will remain so in the short term, although here is to hoping it won't. WHAT DOES IT ALL MEAN? The most obvious conclusion here is that I have only scratched the surface. The following points are worth highlighting, though. From an economic point of view, fertility close to replacement levels appears to be optimal. That said, the demographic transition is a dynamic process, and is not characterised by equilibrium. The contrast between relatively balanced fertility rates in the An- glo-Saxon countries in contrast to low fertility in Europe and Asia has key implications for capital flows. In my view, growth in rapidly age- ing economies is not driven by do- mestic demand, and they will tend towards a preference for external surpluses; some have called this the second demographic dividend. Finally, the traditional definition of emerging markets is mislead ing. Many so-called EMs are now ageing much faster than the major ‘Anglo-Saxon economies, which is a key point for investors. fig. 09 / Those with no hope? — fig. 10 / At least fertility is falling Thai oy curs merge To em 20462015 : EEE LEEPER hei cures angen Tt 18420041 2510205, a 2 au LDL ALLEGE es Se tS Gehan com