Demography, price-earnings ratios – and the PP
The Money section of the weekend’s FT – yes, a regular read for me, though usually as a bit of financial anthropology more than anything else – carried a piece by Norma Cohen which suggests that the investment growth of the late C20 will not be recovered for a long time, if at all. The reason for this is the change shape of Western populations: the passage of baby-boomers from middle age into retirement, and the shrinkage of the youth population. The proportion of people aged 65+ in the UK has risen to 17%, and is projected to go up to nearly 25% in the next two decades.
Conversely the 35-54 group is declining. This is the group which typically is saving for pensions, and therefore making money available for investment. Cohen reports on work which shows a clear correlation betweeen the the size of this age group and the p/e (price/earnings) ratios of UK equities. The p/e ratio is a proxy measure for what investors think companies will earn, so a high p/e means that investment money is chasing equity, pushing prices up, and providing yields for our pensions. Ok so far?
As the middle-aged group shrinks, so the p/e ratio declines, and stock returns fall. In other industrialised countries the projected demographic shifts are in a similar direction , and often more accentuated. China and other Asian countries are also experiencing an ageing of their populations, so there is no global counterweight from the emerging economies.
I actually have some problems with the way the demographic ratios are calculated. We are told that the working population in Europe is expected to decline from 67% today to 56% by 2060. But this assumes that the definition of the working population remains the same, with the upper age limit at 65. Policy analysis nearly all points towards a lengthening of the working life (though not all go as far as 75, as David Watson and I argued in Learning Through Life) but the calculations persist in using conventional categories, because that way you can show trends more easily. The picture would look quite different if they used 70 as the upper limit, which is increasingly realistic.
But the point here is to relate the demographics and the economics to the Paula Principle. The central issue is the need for an approach which locates this in a genuinely lifelong context. There are two interelated connections. Lengthening the working life will enable more women (and men, but it applies more to women) to interrupt their careers and yet have time to build a full career. The key implication, though, is that the emphasis has to be on using human capital most effectively over the full lifecourse. This means identifying where, how and when it is currently not used effectively – and we know which direction that points in. So there we have it: the PP in its macro-economic context!