Time for a new set of business models as the peace and demographic “dividends” become deficits again

A new year is a time for looking forward, rather than backward. And the arrival of 2024 reminds us of the need to refocus on the future rather than the past.

Importantly for companies and investors, it is clear that the two super-critical ‘dividends’ of the past 30 years are now reversing:

  • The ‘demographic dividend’ of constant growth and low inflation created by the BabyBoom generation has come to an end. And increasing life expectancy means the Boomers are becoming a replacement economy.
  • Secondly, we have lost the ‘peace dividend’ created by the end of the Cold War in 1989. Instead, we have two major wars underway – in Europe and the Middle East.

Instead, we are starting to see a toxic combination of geopolitics, energy shortages and rising inflation start to take their place.  This means we will start to see a division into  Winners and Losers appear again, for the first time in 30 years.

2024’s potential Winners will be those who recognise that business models have to change. They need to move from being supply-driven to become demand-led, due to the end of the demographic dividend.

The reason is simply that the world’s Top 10 economies are two-thirds of global GDP. And as the chart shows, 8 of them are ageing very rapidly:

  • Back in 1950 the G10 populations were all very young. Only about 15% were in the Perennials 55+ age range
  • But yesterday’s ‘demographic dividend’ has become today’s ‘demographic deficit’. The Perennials proportion will have more than doubled by 2030 to around 35%
  • Brazil and India are the only exceptions, with a Perennials proportion of 24% and 18% respectively
  • But both countries are relatively poor, and together only account for 5% of global GDP.

Today’s population growth is now being driven by increasing life expectancy, rather than births.  Essentially, the Boomers are therefore becoming the Perennials.

And whilst increasing life expectancy is good news for them personally, it is bad news for economic growth.  They are essentially a replacement economy. They already own most of what they need, and their incomes decline as they move into retirement.

This matters for the global economy because consumption is 60% – 70% of GDP in western economies.

Since 2000, this impact has been disguised by the central banks’ reckless stimulus policy:

  • Essentially, they tried to “print babies” to create demand
  • But their failure is evident in the vast pile of global debt that the policy has created
  • Instead of the promised growth, this has now reached an eye-watering $310tn, nearly double 2008’s level

In addition, we have now lost the ‘peace dividend’ that enabled governments to reduce defence spending after the end of the Cold War.

As the chart of UK Defence and Health spending as a % of GDP shows, this freed up vast amounts of money. It was instead spent on domestic priorities such as health, education and transport.

By 1998, US President Bill Clinton was even able to boast in his State of the Union address that the US had achieved a balanced budget for the first time in 30 years.

But fast forward to today. Russia’s economy is back on a war footing as President Putin has confirmed. In response, Germany’s Defence Minister, Boris Pistorius, has already suggested the government may well need to follow Sweden’s example and reintroduce conscription.

The next few years are therefore likely to be very different from anything that we have known in our working lives.

Some of us do, of course, remember the Cold War. But none of us have ever lived in an economy facing a major demographic deficit and a record level of debt.

And so scenario planning is therefore essential in the face of this uncertainty.

 

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