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The Great Demographic Reversal And Its Consequences – Financial Services

Spiralling inflation, a war in Europe, and supply chain
disruptions, the like of which have not been seen in decades.
It’s little wonder that stock markets have reacted adversely to
the resumption of an upward trend in interest rates and the first
moves to withdraw quantitative easing.

Leading Central banks, accustomed to decades of ultra-low
interest rates and easy money, clearly saw the re-emergence of
inflation as transitory, the result of short-term factors that will
abate in time. And indeed, the War in Ukraine will eventually come
to a resolution, the global energy supply will be remapped, and
food security restored.

But there is something bigger happening. A trend established
three decades ago is reversing, and it will have significant
long-term consequences for cross border trade and the world
economy. A global demographic revolution is underway. The
working-age population as a proportion will fall everywhere, except
in Africa.

Recent research by Professor Charles Goodhart
and Manoj Pradhan based on UN population statistics ascribes much
of the disinflationary trends of the past 30 years to globalisation
and the rise of China. This global labour supply shock brought
hundreds of millions of new workers into the urban economy,
boosting the ratio of workers to dependents in a demographic sweet

These forces will dissipate as the world population ages and
global supply chains shorten. China’s working-age population will fall 23%
by 2050
, and the size of the youth population is also declining
in many countries. The days of moving work to cheaper sources of
skilled labour as an alternative to investment and innovation are

Labour will again take a more proactive role in a world short of
workers and will reassert its role in the relationship with
business and capital. A resurgence of inflation will follow.
Central banks wrestling with inflation will look to increase
interest rates. And Finance Ministers will resist in the face of
mounting debt servicing and pension costs, under pressure from
voters, angry at the emerging cost of living crisis.

But how likely is this scenario to play out? Is structural
inflation returning, and is globalisation indeed in retreat, or
will regular service be resumed as Central banks act to bring
things under control?

In 1950 there were 2.5 billion people on the planet. In 2019,
this had increased to 7.7bn. According to the World in Data analysis of UN statistics, the
global population is expected to be 11.7bn by the end of this
century. But this increase has been accompanied by an ageing
population and a fall in the birth rate, resulting in rising median
age and fewer young people in many countries. A phenomenon that
Hans Rosling termed ‘Peak Child”.

According to the World in Data, “the future will be very
different from the past. Over recent decades we have seen global
demographic changes which will bring about the end to rapid
population growth: Until the mid-1960s, each woman around the world
had on average 5 children. Since then, the number of children has
halved and is now just below 2.5 children per woman. The global fertility rate has halved.

In their book, ‘The Great Demographic Reversal‘ Professor
Charles Goodhart and Manoj Pradhan predict that this fall in the
birth rate will lead to fewer workers and an end to an abundant
supply of cheap labour:

“A shift in the global availability of low wage workers
in the larger global market, including China and Eastern Europe,
have switched the underlying trend from a massive surplus of
available workers to one in which the workforce is beginning to
shrink. In the years before Covid, the bargaining power of labour
had been trashed; now it is beginning to recover quite sharply and
will remain stronger over the next few decades.”

With many countries falling below the population replacement
rate, the current shortage of workers may prove to be less
transient and more structural than is currently appreciated.

So, what are the implications of the Great Demographic Reversal
for the global economy and International Finance Centres in

Output growth will decline as Moore’s law runs out of steam. And the
much-anticipated productivity gains from new technology fail to
compensate for the shortfall. Still, a rapidly ageing population
supported by fewer workers will exacerbate the caring crisis
evident in much of the developed world.

Inflation may prove stubbornly resistant to Central bank
prescriptions as labour driven wage increases escalate, and rising
health and pension costs encourage governments to raise taxes. We
have recently seen several incumbent governments in South America
and Australia fall as voters express increasing disquiet at the
rising cost of living. Central banks and governments hooked on
low-interest rates, and high public debt are boxed in, with tighter
monetary policy and a withdrawal of stimulus looking more like a
poisoned chalice than a panacea.

Faced with a complex world that is challenged by shortages of
all kinds, what are the implications for International Finance
Centres, and what should their response be?

Fiscal pressures will see taxes and government debt rise, and
weaker growth will drive public resentment at the significant
increases in the cost of living. Incumbent governments will look
for blame candidates. Governments alone do not have the financial
resources to deal with their challenges. The Pandemic has left
public finances in a weak state, and this problem will be
aggravated by the energy and food crisis triggered by the invasion
of Ukraine.

Society will need private capital in large quantities if the
building blocks of any meaningful recovery are to be laid.
Fortunately, the benign low-interest environment of the last 30
years means abundant private capital is available. It is estimated that total investible wealth exceeds
$250 trn, and real estate assets add a further $235trn to this

The recovery period will see exceptional demand for investment
in energy and agribusinesses. Technology will be rewarded with new
investment into innovative A1 and productivity-boosting measures,
with services and manufactured goods increasingly designed, built,
and delivered nearer to the markets in which they are consumed.

Still, whilst geopolitics will constrain globalisation, it is
not about to disappear but is undoubtedly being reinvented.
Notwithstanding, China and the US remain the two most influential
economies in the world and continue to be mutually interdependent,
despite the tensions of recent years. US imports of goods and
services from China totalled $506bn in 2021, the largest from any
country. US exports to China totalled $151bn.

China’s most prominent business sector is still
manufacturing, and unlike Russia, it is not energy independent.
Access to the lucrative US and EU markets remains a critical export
dependency and will likely remain so for years. The US, whilst
advocating onshoring, has no near term prospect of moving the
supply base of companies like Apple to the US, with supply chain reshoring overall tending
to favour Vietnam and Mexico.

Higher investment demand as businesses position to grasp these
new opportunities will create more significant openings for Private
Capital, including Private Equity. Surging demand will lead to
increased legal structuring work, audit and advisory services,
ongoing fund administration, custody and depositary

Some have predicted strong headwinds for Private Equity going
forward, but we feel these fears are overdone. While Central bank
actions to curb inflation will elevate interest rates, they are not
expected to rise much above the 3 – 4% range. Private equity
investment trusts give a window into the PE world, and many
continue to trade at a discount to net asset value despite the
interest rate outlook. Demand for the inflation-adjusted returns
that Private equity provides shows little sign of abating. While
returns may be harder to come by, we expect the sector to continue
to flourish.

Those International Finance Centres and firms anticipating the
impact of our outlined trends will invest in and nurture the best
talent. They will promote diversity and inclusivity and support the
drive to meet ever-higher governance and international regulatory
standards. They will redouble their commitment to global efforts on
sustainability, transparency, good business conduct and fighting
financial crime. Adopting digital innovation will lower costs and
provide a better customer experience.

In this new environment, Tax Havens that are slow to embrace
these changes will continue to decline. But, the International
Finance Centres that adapt, as transparent Investment Hubs, to a
rapidly changing world, will flourish as demand for their services
and a recognition of their contribution to the global recovery
continues to build.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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