Party like it's 2007 again? Don't hold your breath

The loss of China's low-cost deflationary effect and rapidly ageing populations will ensure that there will be no return to the pre-crisis party of 2008

PUBLISHED : Wednesday, 26 March, 2014, 1:30pm
UPDATED : Wednesday, 26 March, 2014, 11:57pm

Five years after the global financial crash, it is perhaps not surprising that so many regional bosses (and economists, who should know better) are clawing for evidence that recovery is close at hand.

Thousands of executives are still holding their breath, hoping that the pre-2008 party will resume soon.

I have bad news: dream on.

The global ageing trend will affect us in Hong Kong sooner than we imagine

Even if there is passing evidence of some "green shoots" (in the United States at least), the grim reality is that none of us will really discover whether the patient on the table is dead or alive until the life support system provided to the global economy by quantitative easing (QE) is turned off. The process of turning off that life support has just begun, and it will be 2016 before we start to discover the condition of the patient.

Let's assume that by then the news, on balance, is good. That the patient is alive, and likely to recover. Let's put to one side the horrid side effects of QE that will have to be dealt with - like colossally inflated property and equity markets underpinned by loans that are as close to free as we will see in any of our lifetimes.

Beyond that, the reality is that whatever party resumes will not be the same. At least two key ingredients of the pre-2008 party will have disappeared, and we have yet to begin thinking about what will happen in their absence.

And what two key ingredients am I talking about? First, the disappearance of what I like to call "China's deflationary gift", and second the awesome demographic shift that is beginning to affect all economies, with Japan in the vanguard.

First, China's "deflationary gift": few of us have ever properly acknowledged the impetus provided to the global economy between China's opening up in 1978 and the early 2000s, and in particular how this leached inflation out of our growth. As thousands upon thousands of mainland-based companies jumped on the bandwagon to sell every imaginable consumer good into global markets, the price of retail goods in our high street shops in the West were kept securely low.

It was standard practice for big Western purchasers to return year after year with demands for prices to be squeezed down as a condition of exporters retaining a production contract. And they succeeded.

A combination of weak negotiating power, low costs and relentless pursuit of productivity improvements meant that year by year, mainland exporters delivered consumer goods much more cheaply than would have been possible if purchasers had been at the mercy of local labour forces practised in the art of annual wage increases.

It was in the early 2000s that China's leaders began to realise this was a mug's game. It was locking China's workforce in a state of permanent immiseration and stifling the emergence of a domestic middle class that could drive consumer growth and dynamic consumer markets within China.

Since then, China's leaders have forced compulsory annual pay increases averaging about 15 per cent on most of the manufacturers involved in the export economy. Over the past six years, minimum wages have more than doubled.

The policy has squeezed Hong Kong's low-cost manufacturers hard, forced shutdowns of factories reliant on low-cost labour, intensified focus on productivity and efficiency improvements, and driven a shift into higher-technology, higher-value-adding industry.

This has been bad for many Hong Kong manufacturers but good for the mainland's consumer economy and its emerging middle class. Above all else, it has brought to an end the period during which China's "deflationary gift" has reliably kept consumer prices low.

Inflation is about to return to the system, and the consequences will only be properly felt as our consumer economies begin to revive from the 2008 crash.

The awesomeness of the demographic shifts about to engulf us was brought home recently in an Asia-Pacific Economic Co-operation presentation on Japan.

Apparently by 2035, Japan's population will have fallen from the present 120-odd million to about 100 million. Of that 100 million, 45 per cent will be over 65, and an astonishing 25 per cent will be over 85.

In simple terms, that means that about 35 million people of working age will be supporting about 25 million people under working age and about 45 million in their "silver years".

If I were 30 years old in Japan today, my back would already be bending under the anticipated burden of supporting nearly three-quarters of the population on a stagnant or diminishing salary and ever-rising taxes.

I'm not picking on Japan, but it is in the vanguard of the global ageing trend that will affect us in Hong Kong - and even on the mainland - sooner than we think, with huge consequences for what our economies will look like.

As we have been distracted by the challenges of managing the aftermath of the global financial crash, we have neglected the massive implications of this huge demographic transformation.

If there is indeed going to be any party to resume as we recover, it will be for the retired over-65s and the armies of carers that are going to need to be trained to support them on taxpayer funds.

Sorry to continue to be a party pooper.

David Dodwell is the executive director of the Hong Kong-Apec Trade Policy Group