Clem Sunter

The demographic flag

2011-12-21 12:00

Clem Sunter

In September 1989, I remember a conversation I had with the pick of the great futurists in the world at the time - Pierre Wack. It took place at one of our annual scenario planning sessions which were held overseas. Our favourite venue was the Spreadeagle Hotel, an inn in Midhurst, Sussex which dated back to 1430. I always felt that scenario planners could think more imaginatively about the future if they had a bit of liquor inside them.

Anyway back to the conversation. Pierre says to me: "Do you know that two flags have gone up on Japan which suggest its imminent demise?" This surprised me no end as Pierre was married to a lady of Japanese descent. I responded: "What on earth makes you think that, Pierre?" If you remember back to the late 1980s, we all anticipated that Japan was going to be the star of the 1990s (more or less like we feel about China today and its performance in the 2010s). Japan had averaged at least 7% per annum economic growth for the two decades leading up to the 1990s. Indeed we all talked of "nemawashi", the Japanese practice of preparing a tree to be transplanted by digging around its roots. This should be applied to companies seeking to transform themselves, we surmised.

Pierre's answer was unforgettable: "The first flag is declining golf club membership in Tokyo. The Japanese are golf fanatics and if they are resigning from the clubs, then something is happening to their disposable income which is not being captured in the media. The chances of the economy hitting the wall in the short term have gone up sharply. The second flag is to do with what happens afterwards. It won't be a 'V-like' recovery. It won't be a 'U' or 'W' of longer duration. It will be an earlier letter in the alphabet - an 'L' or flat low growth for a long time.

"The reason is that the second flag is a long-term influential one. It is the future demographics of Japan. It is a rich, ageing society. That does not bode well for Japan's export competitiveness; its domestic spending patterns except in the area of health products; and the amount of money that has to be set aside by the government to care for the elderly."

Pierre's analysis was right on the money. Three months later, the crash occurred and Japan's economic growth over the last 21 years has averaged one percent per annum. The quality of life of an ordinary Japanese citizen in this steady state economy has not deteriorated dramatically. What has taken the biggest hit is the stock market. When Pierre made his prophecy, the Nikkei index was on its way up to a whisker below 40 000 in December 1989. It now stands below 8 500 or nearly 80% below its peak more than two decades later. Who said that equities are bound to increase in value if you select a long enough period? Not in Japan.

The grounds for recollecting this conversation is that if Pierre were alive today, he would probably have said the same about Europe. The population is getting older and in countries like Italy the number is actually declining. Not good for economic prospects nor for stock markets. On top of that, you have the short-term flag of vastly over-borrowed governments and the possibility that interest rates on Italian and Spanish debt could go through the roof - like they have done in Greece. That would be the beginning of the "L" or, as some call it, Eurogeddon.

The demographic flag in America is more positive as the age-group in their mid-to-late 30s is set to increase over the next five years. In China, the one-child policy since 1978 is scheduled to cause havoc in 30 years' time. It may be the first nation to grow old before it gets rich. In the words of that old South African advertisement, it makes you think, doesn't it?

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