European stock markets are up this morning on better-than-expected manufacturing data. But investors should be cautious. There's trouble brewing beneath the surface of European equity markets. Demographic trends will hamper economic growth for the foreseeable future. If you own European equities, today's the day to consider selling the rip.
Tracking demographic trends is an essential tool for getting big macro moves right. Think about it. In most developed nations, the age bracket which consumes the most is cohort of 35-54 year olds. Consumption is also a major driver for develped economies. In the U.S., consumption makes up about 70% of GDP. Across the European Union, that figure is about 56%.
Put simply, if this key demographic subset is slowing, you've got a big problem on your hands. And that's precisely what's happening in Europe. In Spain, Portugal, Greece and Italy this peak spending demographic cohort will be decelerating through 2030. As Hedgeye Macro analyst Ben Ryan writes in today's Early Look, "To get more specific, the estimated growth rates in this peak spending cohort [by 2030] for these four economies are -2.5%, -2.3%, -1.8%, and -1.6% year-over-year, respectively – a complete disaster on the surface," Ryan writes.
For the Eurozone as a whole, meanwhile, the growth rate of 35-54 year olds by 2030 will be an estimated -0.7% year-over-year. This compares to +1.0% year-over-year in the U.S., thanks to a lift from Millennials who have now officially surpassed Baby Boomers as the nation's largest living generation.
It gets worse. "While the Southern European countries will experience the largest declines in the peak spending cohort, they will also have the highest 'Old-Age Dependency Ratios' which measures the 65+ year old population as a percentage of the total population," Ryan writes. "The old age dependency population in Spain, Portugal, and Italy is roughly 21%, 24%, and 24%, respectively. For context this 65+ population is 18% in the U.S."
As you can see in today's Chart of the Day, Europe has the combined problem of aging at an ever more rapid rate over the coming five years at the same time as overall population growth slows. Not exactly a recipe for success. Basically, countries that appear furthest toward the bottom right-hand side of the graph are the most troubled. Join Europe, Japan is similarly troubled. Add this to the list of reasons why we think ECB head Mario Draghi "will be the world's most dovish central banker" by the end of the year.
This demographic trend is a key tenet of our #EuropeSlowing macro theme. So again, if you're holding today's pop in European equity markets, it might be wise to sell some here. The coming demographic cliff is a gloomy mathematical fact that will hang over Europe for some time.
