India Beats Russia as Aging Workers Sap Growth: Cutting Research

The era of rapid labor-force growth led by younger and growing populations -- reflected in the so-called demographic dividend -- is coming to an end around the world, according to UBS AG.

That may mean slower economic growth and weaker house prices if history is any guide, economists Andrew Cates and Christine Li said in a Feb. 5 report.

Their study found Asia’s relatively faster economic expansion over the last five decades can be traced to demographic reasons. Younger populations can also explain house-price gains as they drive demand for property.

Asia, led by China and Japan, is now set to see much slower population growth, according to UBS. China’s share of the world population, for example, will fall from about 21 percent in 2002 to about 17 percent in 2032. Only Africa, and to a lesser extent the Middle East, enjoy favorable regional demographic trends.

On a country-by-county basis, potential winners are the Philippines, India, Indonesia and Malaysia, while Bangladesh, Pakistan and Cambodia are even better placed. Brazil, Mexico, Turkey and Nigeria also stand to gain. Not scoring well in UBS’s analysis are Russia, Israel, Australia and Ireland. The U.S. and U.K. fare relatively well, UBS says.

Economies “with positive demographic potential by definition face a more promising future than those that do not,” said Singapore-based Cates and Li, in London. “The lessons of the last few years suggest that they stand to perform relatively well.”

Still, the UBS economists said aging populations don’t necessarily mean economic pain, given policy makers can act to avoid the damage. They can encourage immigration, boost female labor participation rates and postpone retirement.

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Financial markets gave the wrong signals to European authorities during the debt crisis, resulting in excess austerity being imposed, says a new report co-authored by economist Paul De Grauwe.

The study, published Feb. 5 by the Brussels-based Centre for European Policy Studies, found the magnitude of the decline in bond yields following European Central Bank President Mario Draghi’s July pledge to save the euro was closely related to the previous increase. Having suffered the biggest rise in yields relative to Germany before Draghi’s intervention, Greece then enjoyed the largest decline afterwards. Its 10-year bond yield is now at about 11 percent, down from about 30 percent in May.

That suggests to De Grauwe of the London School of Economics and co-author Yuemei Ji of the University of Leuven in Belgium that market panic and relief, rather than economic fundamentals, dominated bond trading during the three-year debt crisis. The artificially high bond yields led governments to demand budget cuts.

Investors “acquired great power in that they spread panic into the world of European authorities, who translated the market panic into enforcing excessive austerity,” said the authors. “The governance of the euro zone will have to change in order to avoid being taken hostage again by volatile market sentiments.”

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There’s a revolution under way in the collateral available in the global financial system, which increasingly relies on it to support transactions.

International Monetary Fund economist Manmohan Singh estimates the volume of collateral -- the assets pledged as security for loans -- has increased to levels on par with monetary aggregates such as the M2 measure of money supply over the past decade.

The challenge now is that the availability of collateral may be constrained by the global financial crisis, European debt turmoil and revamp of bank regulation, Singh said in a report released by the IMF on Jan. 28.

Singh says that since 2007, markets have become less lubricated because the re-use or velocity of collateral has declined. Central banks are increasingly accepting lower-quality collateral for loans, while regulations will force banks to stockpile high-quality assets.

Solutions Singh suggests to increase the availability of collateral could include central banks, such as the ECB, renting out their stock of good collateral. Some fine-tuning of regulatory demands may also be in order, he said.

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For an economy on the edge of a triple-dip recession and witnessing the toughest fiscal squeeze since World War II, it may be a surprise that last year’s employment gains in the U.K. were the largest in 13 years.

Since the first quarter of 2010, the 387,000 decline in government jobs has been dwarfed by the 1.15 million new jobs in the private sector, leaving a net job gain of more than 750,000. The same pattern exists in the U.S.

That shouldn’t be a shock given previous episodes of fiscal tightening around the world, according to London-based Fathom Consulting.

A study by its economists found a pattern of “public down, private up” in the labor markets of Canada, Sweden and the U.K. during the 1994-1999 bouts of austerity, according to a Feb. 4 presentation to clients in London.

Among the reasons is that fewer government jobs help put downward pressure on wages, allowing companies to take advantage of cheaper labor, says Fathom economist Erik Britton, a London-based director of Fathom.

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