Global Investing

Russia’s people problem

President Vladimir Putin is generally fond of blaming the West for the ills besetting Russia. This week though, he admitted in his State of the Nation speech that the roots of Russia’s sluggish economy may lie at home rather than abroad.  The government expects the economy to expand a measly 1.4 percent this year (less than half of the growth the US is likely to see) and long-term growth estimates have been trimmed to 2.5 percent a year.

Much of that is down to the lack of reform which has left many big companies in the state’s (generally wasteful) hands, weak rule of law that deters investment and capital flight to the tune of tens of billions of dollars a year. Yet there is another factor that could be harder to fix — Russia’s poor demographic profile. The population started declining sharply in the early 1990s amid political and economic turmoil, falling by 3.4 million in the 2000-2010 decade, according to census data. The impact is set to be felt sharply from now on, exactly when children born in 1990s would have started entering the workforce.

The consequences are already being felt. Russia will close more than 700 schools this year for lack of pupils and the jobless rate has dipped to a record low of around 5 percent, not because the economy is booming but because the country is running out of people who can take the jobs.

Russian bank VTB estimates that the labour force will shrink at the rate of 0.3-0.5 percent a year over the next decade. And Natalia Orlova, chief economist at another Russian bank, Alfa, (the source of the above graphic) says that in 2013, the labour force will have shrunk by 800,000,  a decline that she expects will gather momentum and ultimately end up at 2 million a year.  Not only will the labour force shrink by 3 percent between 2013-2016, but the share of skilled employees in the workforce has halved over the past decade, she says:

The demographic wave is coming into the market. For the past five years, it was not felt by companies. Now we will see the impact of the population decline as more people become pensioners and fewer young people come to the jobs market. The growth rates of the past decade coincided with better demographics of the 1980s. So we have at least 10 years ahead that should be very painful.

Moscow is not Cairo. Time to buy shares?

The speed of the backlash building against Russia’s paramount leader Vladimir Putin following this week’s parliamentary elections has taken investors by surprise and sent the country’s shares and rouble down sharply lower.

Comparisons to the Arab Spring may be tempting, given that the demonstrations in Russia are also spearheaded by Internet-savvy youth organising via social networks.

But Russia’s economic and demographic profiles suggest quite different outcomes from those in the Middle East and North Africa. The gathering unrest may, in fact, signal a reversal of fortunes for the stock market, down 18 percent this year, argue  Renaissance Capital analysts Ivan Tchakarov, Mert Yildiz and Mert Yildiz.

from MacroScope:

Spend Save Man Woman

Far from being lauded as a virtue, China's high savings rate has been blamed for the economic imbalances underlying the global financial crisis. The criticism being that the Chinese spend too little and rely too much on exporting to Western consumers.

The IMF and World Bank have long called for Beijing to ramp up social spending so its citizens will feel less need to save for a rainy day and instead consume more.

But in their intriguingly named paper,  'A Sexually Unbalanced Model of Current Account Imbalances', New York-based researchers Du Qingyuan and Wei Shang-Jin suggest China's gender imbalance could also be a significant factor in the persistence of its high savings rate. spendsavemanwoman

from Summit Notebook:

Blackrock sees opportunities in shrinking Japan

Japan's population has peaked and all the projections have it sliding sharply in coming decades, raising questions about investment opportunities when emerging markets, in particular, offer much more obvious growth opportunities.

By 2055 government researchers expect Japan's population to slide 30 percent to below 90 million from around 128 million with mushrooming numbers of retirees to be supported by a dwindling workforce.

Yet Japan will still be an important destination for world investors, argues Hiroyuki Arita, the Japan head of Blackrock, the world's largest money manager.