Global Macro Trends: Today & TomorrowJames Carrick / Chris Jeffery

Global Economist / Asset Allocation Strategist

Legal and General Investment Management

30 October 2018

Global Macro Trends: Today & TomorrowGlobalisation, Technology, Demographics, Populism

30 October 2018

3

$3 trn

$17 trn

UK EU World

$80 trn

GDP (2017)

Source: IMF

Notes from a Small Island

The impact of four waves

4

GLOBALISATION TECHNOLOGY DEMOGRAPHICS POPULISM

Global growth… we’ve never had it so good?

5

GLOBALISATION

Source: IMF, Maddisson Project Database, LGIM

Driven by specialisation and trade

6Source: https://ourworldindata.org/wp-content/uploads/2013/05/ourworldindata_world-trade-over-5-centuries.png

GLOBALISATION

Globalisation and urbanisation

7

Tokyo 38

Delhi 26

Shanghai 24

São Paulo 21

Mumbai 21

Mexico City 21

Beijing 20

Osaka 20

Cairo 19

New York 19

Dhaka 18

Karachi 17

Buenos Aires 15

Kolkata 15

Istanbul 14

Population (million)

2015Tokyo 37

Delhi 36

Shanghai 31

Mumbai 28

Beijing 28

Dhaka 27

Karachi 25

Cairo 25

Lagos 24

Mexico City 24

São Paulo 23

Kinshasa 20

Osaka 20

New York 20

Kolkata 19

Guangzhou 18

Population (million)

2030

GLOBALISATION

Source: UN Urbanisation Prospects, 2014

0%

20%

40%

60%

80%

100%

120%

Emerging markets (E7) Developed markets (G7)

8

GLOBALISATION

The cost advantage in emerging markets

is hard to ignore

Implied PPP price level

vs. G7 average (2018)

Source: IMF, LGIM

9

Catch-up of emerging markets

0

10

20

30

40

50

60

70

80

90

100

2016 2030 2045

E7

G7

GDP at market exchange rates, Constant 2016 prices, Trillion US$

The future’s bright … the future’s emerging

Source: PWC, The World in 2050

GLOBALISATION

Energy… a scarce resource or a technology?

10Source: Getty images

TECHNOLOGY

Global warming…

11

Massive changes needed to limit global temperature rise

Source: https://commons.wikimedia.org/wiki/File:Global_Warming_Predictions.png

TECHNOLOGY

Energy mix revolution…

12

Has been done before…coal, wood, animals

Source: Ayres and Warr (2007)

TECHNOLOGY

Solar and battery prices

13

Trend decline in prices due to technological improvement

Source: Bloomberg New Energy Finance

TECHNOLOGY

Battery technology

14

Inverse relationship between density and price

Source: http://batteryuniversity.com/learn/archive/battery_statistics

TECHNOLOGY

Other technology prices falling too

15

Collapse in data storage -> big data -> AI-> autonomous driving

Source: https://www.computerworld.com/article/3182207/data-storage/cw50-data-storage-goes-from-1m-to-2-cents-per-gigabyte.html

By Grendelkhan [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], from Wikimedia Commons

TECHNOLOGY

Disruption from falling data storage prices

16

Will the robots destroy all the jobs?

( Nand Flash = SD card, DRAM = computer memory )

Source: https://www.computerworld.com/article/3182207/data-storage/cw50-data-storage-goes-from-1m-to-2-cents-per-gigabyte.html

0

1

100

10,000

1,000,000

100,000,000

10,000,000,000

65 70 75 80 85 90 95 00 05 10 15

Price of storage and memory costs through the years

Disk DRAM

TECHNOLOGY

Disruption is happening quicker?

17

Smartphone 4 years, computer 16 years, phone 43 years

Source: https://ourworldindata.org/technology-adoption

TECHNOLOGY

18

“There is a world market for maybe five computers”Thomas Watson, IBM Chairman, 1943

“There’s no chance that the iPhone is going to get any significant

market share”Steve Ballmer, Microsoft CEO, 2007

“The telephone has too many shortcomings to be seriously considered

a means of communication”William Orton, Western Union President, 1876

TECHNOLOGY

Don’t underestimate the potential for

technological change

Demographics – Population Pyramid Scheme

19

Running out of workers!

1980 2015 2050

Source: UN WPP 2015

Western Europe Population Pyramids

DEMOGRAPHICS

Population Pyramid Scheme – Rising life expectancy

20

• In 1908, life expectancy was

BELOW pension age

• In 1940s, the gap was 7 years

• Today, the gap is 17 years

60

65

70

75

80

85

1910 1930 1950 1970 1990 2010

Average life expectancy of a 20-year old (i.e. survived childhood)

Average

Source: ONS

DEMOGRAPHICS

More retirees than school leavers!

21

Net effect = shrinking domestic born workforce

-250,000

-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

80 85 90 95 00 05 10 15 20 25 30

Net change in domestic-born workforce (nb this excludes retiring immigrants!)

Net school leavers less retirees

Source: ONS

DEMOGRAPHICS

UK story the same globally…

22

Global labour force slowing

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25

Global labour force growth(adjusted for age and gender productivity)

Countries weighted by size of economy Countries weighted by population

Source: OECD, UN, Macrobond, LGIM estimates

DEMOGRAPHICS

0

5

10

15

20

25

30

35

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Welfare spending Non-welfare spending Taxes

Tax and spendMiddle-aged taxpayers fund children and pensioners

23Source: LGIM, Macrobond, OBR

Tax receipts and public spending by age, £000sDEMOGRAPHICS

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

2015 2020 2025 2030 2035 2040 2045 2050

Public finances under pressureLower taxes and higher health/pension costs to boost deficit

Source: OBR, LGIM estimates.

Cumulative impact on public finances (% of GDP) from ageing

24

DEMOGRAPHICS

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 99%

An

nu

alis

ed r

eal i

nco

me

gro

wth

Percentiles of the global income distribution

Global inequality has fallen due to rise of China

25Source: “Global Income Distribution: From the fall of the Berlin Wall to the Great Recession” Lakner and Milanovic,

World Bank Economic Review, September 2015

The global “elite”

EM middle class

DM middle class

But developed market middle class has suffered

POPULISM

Inflation impact of populist shift clearer

than growth impact

26

Populism

Protectionism

Weaker trend growth

Fiscal spending

Stronger short-term growth

“An ideology that pits a virtuous and homogeneous people against a set of elites

and dangerous ‘others’ who are together depicted as depriving

(or attempting to deprive) the sovereign people of their rights, values, prosperity,

identity, and voice”

Albertazzi & Duncan (2008), Twenty-First Century Populism

Higher inflation

Source: LGIM

POPULISM

Trade war?

27

US often raised tariffs… but 1930s was first time we saw retaliation

POPULISM

Imports from Rest of the World

Imports from China

28

Goods

Services

$ 4 trillion

$ 10 trillion

$ 0.5 trillion

$ 2.5 trillion

US consumption US imports

• 10% tariff on all Chinese imports is still only an average tariff of 1.7%

• CPI impact of tariffs is small but noticeable…

• Tariffs so far amount to ¼% of GDP

Trade war?Let’s keep it in context

POPULISM

Source: IMF, BEA, LGIM

29

400,000

420,000

440,000

460,000

480,000

500,000

520,000

540,000

560,000

1965 1975 1985 1995 2005 2015 2025 2035 2045

Population

Population projection: zero immigration

Population projection: median estimate

Thousands

150,000

200,000

250,000

300,000

350,000

400,000

450,000

1965 1975 1985 1995 2005 2015 2025 2035 2045

Population

Population projection: zero immigration

Population projection: median estimate

Thousands

Source: United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The

2017 Revision, DVD Edition.

Who needs high immigration?US population outlook EU population outlook

POPULISM

30

of Americans described

immigration as having a

“very or fairly positive”

impact on their country

of Europeans* described

immigration as having a

“very or fairly positive”

impact on their country

Source: “Global Views on Immigration and the Refugee Crisis” Ipsos, Sep 2017. European data are an unweighted average of

Hungary, Italy, Belgium, France, Poland, Germany, Sweden, Spain and the United Kingdom.

Who wants high immigration?

POPULISM

31

POPULISM

Source: BBC

32

UK

INFLATION

UK REAL

YIELDS

GLOBALISATION TECHNOLOGY DEMOGRAPHICS POPULISM

So what?

Source: LGIM

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33

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