Monday, 5 January 2009

Baby boomers will extend the global crisis

A SHARP drop in the number of baby boomers in western economies will exacerbate the global crisis, according to a report by Merrill Lynch.

It says that "median" baby boomers are now moving into their 50s, past their "peak-spending age" of 47 years.

Combined with an end to the era of ever-increasing credit, the ageing population means that the global recession will last until at least mid-2009 - and possibly much longer - far outstripping the typical post-war recession.

"After a buying boom over the past 20 years ... it looks as though the boomers are done," David A.Rosenberg, North American economist at Merrill Lynch, said. "For the first time in four decades, we cannot expect to see the demographic cushion to consumer spending that helped ease the blow in each of the recessions dating back to the 1970s,"

Studies show that by the age of 47, people have bought the biggest house they are likely to buy, they are earning the most they are likely to earn, and their children have mostly left home, leaving them more disposable income to spending on "dream-fulfilling" goods. Spending on Harley Davidson motor bikes, for example, is higher in the 45-50 age group than any other.

But beyond age 47, people enter into a more frugal era of their lives when they are more likely to trade down than up, and consumers are not so much buying new goods as replacing old ones.

In short, their biggest contributions to the economy are behind them.

This correlation between the number of baby boomers and growth in the stock market was first noticed by American investment strategist Harry S.Dent who, in the 1980s, saw two graphs -- one of the S&P500 Index and the other of birth rates. He spotted that the graphs were virtually identical, but on a 47-year time lag.

Using this technique he was able to predict the collapse of the Japanese stock market in 1989.

Based on this "spending wave" theory, the more 47-year-olds in an economy, and the more people there are approaching that age, the better the economy should perform.

But if the numbers are declining, it spells bad news for the economy and therefore the stock market.

"American consumers have been the engine-room of global growth for decades," Shane Oliver, chief economist at AMP Capital, said. "Fewer US consumers spending less money will mean less demand for imported products from all over the world."

At the same time, Rosenberg said the "buy now pay later" days are a thing of the past, with Americans likely to save much more of their income instead of borrowing to shop on credit.

"The 20-year secular credit expansion came to an end just over a year ago, an unprecedented event in the last six decades and, in most cases, beyond our own collective personal experiences," Rosenberg said.

"As mentioned, this is a recession that may ultimately be labelled something a little different once we come out the other side - not unlike how the Great War ultimately was renamed World War I."

Certainly, he is forecasting a far longer recession that is more like pre-World War II recessions.

"In the post-World War II era, recessions last 10 months on average. We were spoiled," he said.

"There have been only two credit contractions we can draw inferences from: the 1930s and Japan in the 1990s.

"And we must respect the differences and understand the similarities. But what we learn from recessions that are rooted in shrinking household balance sheets is that the process of de-leveraging, asset liquidation and debt repayment, tends to last years -- not months or quarters."

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