Damning Demographics

It’s 8 or 9 years since the chill winds of “credit crunch” started to blow.  Pre-Brexit, after a long economic winter, George Osborne was quick to herald the “green shoots” of recovery.  Economic figures for the 2nd quarter of 2016 were encouraging.  All tying neatly into an optimistic and traditional assumption that recessions and booms are cyclical, and that things must be looking up.  But what if that’s not the case?

For the purposes of this article, let’s pretend that June 2016’s referendum never happened, and I’m going to ignore the potential issues that a post-Article 50 may or may not bring, as this impact is so difficult to predict.

As per the opening paragraph, the general assumption is that recessions happen, they’re unpleasant, things are tough for a few years and then the good times come back.  But when, we may ask, are things going to get better? It’s already been 8 or 9 years.  Maybe the cycle has already ended, and the past year or so is as good as things are going to get? 

Why such a gloomy prediction?  Well, the UK’s overall population is getting older. We have a record number of centenarians.  The average age in the UK has risen to around 40.  The growth in the number of people of pensionable age outstrips that of younger people in full-time work.  This leads to an unbalanced economy, with fewer people working (or working fewer hours), than working full time.  A larger population of pensionable age people becomes reliant economically on a smaller pool of working people.  The nation’s overall productivity drops.  What else?

Well, (and forgive a few crude generalisations regarding the spending habits of both age groups), younger people, on the whole, like spending money: gadgets, clothes, socialising.  If they’re lucky, they may even get enough cash together to buy a house.  In an economy calibrated towards the service industry, this type of spending is essential.  However, we simply don’t have enough younger people earning and spending the sort of money needed to fire the economy.

Conversely, more mature people are generally more restrained with their cash.  They are better at saving.  They are less likely to “need” the latest tech gadgets or clothes.  Crucially, in respect of those high-value items, the trade in which really boosts the economy – cars, houses – people are less likely to upsize those in later life.   Quite the opposite from the younger generation’s stereotyped spending pattern. 

In broad terms, those that have the money aren’t spending it.  Those that we need to spend the money don’t have it.

So, what are the solutions?  There is an understandable aversion to a further proliferation of cheap credit after the problems it led to in the last decade.  Quantitative easing is attempted repeatedly in lieu of the absence of any other ideas, but to little effect.  Controversially, the most logical step may be to allow in a generation of young immigrants ready to work, spend and settle in the UK, thereby plugging the demographic vacuum and re balancing the economy in the long-run, but there is little political appetite for such a bold policy.  With this level of uncertainty, now is the time to begin prudent financial planning for you and your business, and we can assist you with this.