A multi-faceted journey

Japan is an extremely well-developed country with a long history of high-tech, a production machine driven by continuous improvement to a level of perfection that is hard to beat. Its patriotic pride makes the same demands as its society gradually shifts toward services, and we are struck by how well everything works, at airports and in traffic, and how well the smallest details in hotel rooms or on the breakfast table are meticulously planned and decorated. Unemployment is low because this perfection requires a lot of hours by dedicated specialists. It seems the labour force is being rationalised away from industry to instead serve the wealthiest in society.

At the same time you cannot avoid being struck by the fact that the country is no longer growing. The working population has been falling for a long time and the number of retirees is steadily growing. The country’s total population has also been declining for a while. This has very tangible consequences. An ever-decreasing number of taxpayers has to support an ever-increasing group of retirees, who are also accustomed to a high standard of living and, in their healthy society, will also live for ever-longer, in statistical terms. Consumption patterns are changing, and hence also potential growth. A society that was driven in its years of greatness by a high level of productivity improvement in a world-leading export industry now has to look on as it is overtaken by more rapidly developing countries, and productivity growth is becoming increasingly difficult in a society where scalable manufacturing industries account for an ever-decreasing component. In concrete terms, for example, this leads to gloomy prophecies for the domestic market when you meet with local car manufacturers. And the younger generation is not as interested in buying cars, so demand seems to be structurally diminishing. Eyes are turned instead to export markets in economies with faster growth. The same applies to many manufactured products. When you leave the country you’re struck by the feeling of calm at Tokyo’s airport. The busyness you might expect, with people stressing into or out of one of the world’s largest cities, is absent and in its place is a sense of harmonious calm, like a pensioner looking back proudly on his or her life’s work.

China is a different story. As soon as you land in Shanghai you’re struck by the difference in pace; more intense; more life. And also far more developed than when I visited the city just a few years ago. It is no longer one giant construction site, and the avenues and now lined with well-kept and mature planting and clearly designed walkways. The construction cranes are certainly still visible, but further from the city centre and the clusters are thinner than before. In the central parts, old colonial elements are mixed with modern steel and glass, with Pudong’s nightly glow adorning the city like a crown as darkness falls. Compared to Tokyo, Shanghai feels like a mischievous little brother who, after a chaotic childhood, has grown up and may be heading for middle age. If you compare China’s demographic situation with Japan’s the situation is completely different. Or at least it has been.

Over the past 40 years its demographics have changed radically. The working part of the population (defined as those between the ages of 15 and 64) has risen sharply, while the number of dependents (in this case mainly children under 15) has decreased as a proportion of the population. A largely expanded working-age population, which has also moved rapidly into the cities, has led to a somewhat explosive increase in GDP and a huge improvement in productivity. China’s population also happens to be more than 10 times greater than Japan’s, so the impact on the world economy is stunning when a country like China undergoes a major industrialisation phase over a short period. Initially there is an expansion of infrastructure, which consumes steel and concrete as roads, railways and new cities grow like mushrooms. In parallel a manufacturing industry is built, expanding capacity faster than the country’s own demand can absorb, despite its own enormous needs. This first appeared in heavier industries like steel and cement, but was followed by shipbuilding and even telecoms and wind power. There are ever more sectors in which Chinese producers are going from being simple copiers of Western predecessors to now being technological leaders, with better economies of scale than anyone else. China has high ambitions to be a leader in an increasing number of disciplines; everything from alternative sustainable energy production to modern medical technology and big data. 

China’s growth has gradually slowed in recent years, and it is now increasingly turning into a service economy. This is a process that takes time, but the goals and the level of ambition are clear. The question, however, is what consequence this will have for the rest of the world. China’s demographic advantage is lessening, slowly but inexorably. An ageing population with a higher average life expectancy increases in the number of retirees, and the previously favourable relationship between the working-age and dependent populations has now started to turn the other way. As each year passes, more and more people will become dependent while the injection of young people heading into work will fall short. 

Japan’s relationship between the working population and dependents bottomed out in 1992. Since then, the relationship has deteriorated steadily. China reached its corresponding base in 2011, at an extremely favourable level. In 1989 and 1990 Japan grew more rapidly than China, but since then China has totally outclassed Japan. China’s growth peaked in 2007, with GDP growth of just over 14 percent. Japan bottomed out in 2009, when GDP instead fell by 5 percent. 

What will happen in the future? As always this is impossible to answer, but we can make a few observations. The conditions prevailing during the extreme period of growth from 2003-2007 no longer exist. Major migration into the cities is at least partly over. The demographics are no longer as favourable, which impacts the economic outlook, and consumption patterns are likely to change. The need for imported technology related to major infrastructure projects is decreasing as domestic skills improve, and demand will probably gradually decrease. There is a clear risk that the stars of industrialisation, such as commodity companies and manufacturers of investment goods and pure industrial goods, will no longer shine the brightest. As a society matures, the more locally produced services are the ones that become more important.

China’s GDP grew by 6.7 percent in the first quarter of 2017. When we met a number of companies at their locations, it became apparent that some sub-sectors were red-hot during the quarter, not least construction machinery. Both Volvo and local manufacturers showed very high growth rates, as did subcontractors like Trelleborg. Similarly, car sales grew at a good pace during the first quarter. However, car sales are expected to calm down during the remainder of the year, according to several companies we met on location, and there is reason to believe that this could also apply to the growth rate for construction machinery. Growth in the first quarter should be viewed in relation to a very weak market for several years, and although the rate is likely to remain high in the second quarter, the question remains what will happen next. This autumn will see the Communist Party hold its 19^thNational Congress, and four of the seven members of the Politburo Standing Committee are expected to retire. This could be the trigger for a major political change in China. 

After the outcome of voting in the UK and the US, we have learnt that it is almost impossible to predict the consequences of a democratic process. This is perhaps even more difficult with a process that is anything but democratic. It therefore feels safer to rely on demographics. These are what they are, until the hands of time slowly reverse the circumstances. For the time being, and for a number of years into the future, China will be battling against and ever-tougher demographic situation, and the previously rebellious teenager is about to reach middle-age.

Perhaps most interesting conclusion for us in the Western world is how strongly demographic structure affects the underlying economy in the above comparison, illustrated by two major economies that have experienced extreme changes. But if we examine the chart below we can see that Sweden is beginning to see the same development as Japan, and that the whole world’s development is beginning to bottom out.

Source: World Bank. The age dependency ratio is the number of dependent people, defined as people younger than 15 and older than 64, in relation to the working-age population between 15 and 64. The chart shows the number of dependents per 100 people of working age.

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