Ageing to punish retail

In 2008, the Australian Bureau of Statistics (ABS) released long-term population projections for Australia under three scenarios:

  1. High growth scenario (Series A), which assumes an increase in the fertility rate, higher net overseas migration than existed in 2008, and an increase in life expectancy;
  2. Medium growth scenario (Series B), which largely reflected the trends in fertility, life expectancy at birth, and net overseas migration that existed in 2008; and
  3. Low growth scenario (Series C), which assumes low assumptions for fertility and net overseas migration.

The assumptions underpinning these projections are provided in the table below:

And the projected trajectory of Australia’s population under these assumptions is shown below:

Over the next few weeks, I intend to write a series of posts examining the impact of Australia’s changing demographics on various areas of the Australian economy.

In today’s post, I will focus on the expected impact of population ageing on Australian consumption expenditure, which includes retail spending.

To illustrate the link between an economy’s age structure and consumption expenditure, consider the below chart showing the average weekly expenditure of Australian households by age group, taken from the latest ABS Household Expenditure Survey.

As you can see, household spending peaks between the ages of 45 and 54, before falling sharply. A household in retirement (65+) spends less than half of what a 45 to 54 year-old household does.

This relationship between a household’s age and expenditure has also been recognised internationally by world famous demographer and author, HS Dent, who claims that spending typically increases until age 46 and then begins to decline (see below chart).

Now consider charts of Australia’s projected population, split-out by age group, under the three growth scenarios discussed at the beginning of this article.

First, the low growth scenario (Series C):

As you can see, under the low growth scenario, the share of the population at the peak spending age of 45 to 54 (black line) is projected to fall gradually over the coming decades from its current high level as the Baby Boomers enter retirement. The second highest spending cohort – those aged 35 to 44 (green line) – is also projected to fall as a share of the population.

Now contrast these outcomes with the frugal 65+ cohort (orange line). Their share of the population is projected to increase rapidly over the next 25 years as the Baby Boomers retire.

Taken together, the outlook for consumption spending under the ABS’ low growth (Series C) assumptions is particularly bearish, with the higher spending age groups declining in share relative to the lowest spending age group.

Now consider the medium growth scenario (Series B):

The outcome is essentially the same as under the ABS’ low growth scenario.

Again, the two highest spending cohorts – those aged 45 to 54 and 35 to 44 – are each projected to fall as percentage of the population. By contrast, the frugal 65+ age group is projected to increase significantly in relative size, albeit by slightly less than under the low growth scenario.

Overall, the outlook for consumption spending under the ABS’ medium growth (Series B) assumptions is also very bearish, with the higher spending age groups declining in share relative to the lowest spending age group.

Finally, consider the high growth scenario (Series A):

Again it’s more of the same, with the two highest spending cohorts – those aged 55 to 64 and 35 to 44 – each projected to fall as a percentage of the population, with the lowest spending age group – those aged 65+ – expected to increase it’s share.

The key difference between the high growth scenario and the low growth scenario is that the 65+ cohort is projected to increase in share by slightly less, whilst the proportion in the 55 to 64 age group is projected to fall by more.

Despite the subtle differences between the scenarios, the negative long-term outlook for consumption is much the same, with the higher spending age groups declining in share relative to the lowest spending age group.

And with the Australian retail sector already under siege from household disleveraging and falling home prices (reported here and here), the impending retirement of the Baby Boomer generation provides yet another unwanted headwind.

In my next post, I will examine how the ageing of Australia’s population might affect asset values.

Cheers Leith

[email protected]

www.twitter.com/Leithvo

Comments

  1. I don’t see anything bad in long run in consumption going down. It seems to me that age of consumption will be over sooner than later.

    • The Real Dank Castle

      In that case you’re forecasting the end of this epoch of capitalism which is almost entirely geared toward consumption.

      • This epoch will end like every other before. 2056 sound far enough to make that transition smooth. I just hope new epoch will be better.

  2. Very interesting Leith – I tilt more towards option C (30 million population) as the most likely outcome – instead of the bullish (and outlandish) 45 million plus crowd,.

    But wouldn’t consumption growth nominally rise under any scenario, given the number of “new” 35-54 Australians rises as well?

    • True Prince. More people = higher aggregate demand and consumption. But my piece is more about consumption growth relative to GDP. With significantly more frugal oldies, we can expect less consumption relative to the current age profile.

    • >But my piece is more about consumption growth relative to GDP

      Roger: this implies a new “rebalancing” within the economy, considering the frugal oldies hold most of the wealth.

      That has interesting deflationary outcomes – particularly for investing in retail stocks.

      Look forward to the rest of the articles!

        • Now “we” are talking about the real effects of what is in play!!!

          I tackled Bernald Salt by email probably 3 years ago – no response! He can’t seem to see the wood from the trees when it comes to peak consumption, the dramatic effect of contraception in the western world and the unavoidable readjustment to our lifestyle (the advances over the past 20 to 30 years have been phenomenal, technology had a fair bit to do with it as well the growth in GDP by numbers of people).

          At best, we have a period of consolidation in front of us – for the lucky few who take action in preparation for the next 10 to 12 years.

          Great work Leith, for those fortunate enough to take in your fantastic work, they will be the ones able to think about what to do next – but they must take action and more most they won’t.

          Cash sounds great to me. And yes DEFLATION is enemy number one.

          Can’t wait until you show the birth index forward projected by our predictable spending lifecycle to forecast GDP from the 1933-1962 group (and then the 1962 to 1975 hole)… not to forget the inevitable shift to saving from spending to exacerbate the downturn (read DEPRESSION in the whole world this decade … not just the western world).

          It will be an interesting day when people finally understand what contraception has created – pardon the pun!

          Phil

  3. Sandgroper Sceptic

    We need to move away from the consumer/growth/growth model anyway. it is somewhat ironic if demographics does a large part of the heavy lifting.

    Whilst retail will be down, some other sectors will be up – health and lifestyle services should do ok.

  4. One of the commenters here once pointed at a report that the level of emigration is up. If the economy gets bad here, we have plenty of immigrants that could turn around and go home. The institution of a carbon tax may be the last straw for many. I’m a dual citizen from England and am considering heading back to the UK where the rent on a similar house is almost 40% cheaper. An amazing turn of events.

    • Emigration is up and rising since 2008. Multi-nationality is the joker the labour force is holding in its hand.

      If Australian employers abandon their workers then those workers will abandon Australia.

      Australian retirees will be stunned when nobody is left to pay for their aged pensions and healthcare because workers have been impoverished.

    • If the Australian economy goes south, talk about being between a rock and a hard place. Australia or the UK, wow.

      Personally I’d look to move to Asia.

      • The_Mainlander

        Totally agree can’t stand the idea of the UK 4 1/2 years was 2 years too many for me never again.

        I think Asia would be a much better move.

        TM.

    • Steven,

      When the “economy goes bad” the exchange rate won’t be the same as now.

  5. Good point atlength, so many people in my generation residing in Melbourne are either currently international students or former international students (now residents) who are here to improve their economic chances for themselves and their family.

    I’m thinking the young people from the one child policy generation in China would be particularly prone to leave if there were any economic shocks as there is no welfare state in China and someone my age (late twenties) will be financially supporting four grandparents and two parents within the next couple of years.

    As an Australian by birth I don’t fret about the likelihood of increased taxation on my generation to fund my parents (baby boomer) retirement as being onerous compared to those sort of obligations…

  6. The forecast trends in consumption for the 65+ are developed from hindcasting….which assumes the behaviour of future 65+ year olds will repeat the behaviour of existing and past 65+ year olds.
    I would contend the frugality of existing and past 65+ year olds has largely been a consequence of a lack of capital/income once they reach retirement.

    Will those frugal spending patterns born of necessity continue into the future?

    In the short term perhaps because people near retirement age now don’t have enough super…..but many of them are sitting on very large capital gains in housing (price falls notwithstanding) and many will realise those gains upon retirement and will presumably spend some or all of the money in their twilight years. My parents are the perfect example of a couple who recently sold their home, downsized and are now busy spending the windfall.
    Pretty sure I read somewhere recently that the BBs have also realised they can’t take it with them and intend spending it before they go….
    In the longer run, super will presumably play a larger role in ensuring individuals at retirement don’t need the pension and will have a comfortable income…which they presumably also will spend?
    Another factor which may also affect spending patterns of the future 65+ cohort is that many of them will still be fit and healthy, and may choose to remain in the workforce for much longer.

    So, I suspect while there may be some decline in consumption in the 65+ cohort, it will not be as large as in the past.

  7. People over 65 have lower discretionary spending behaviour because we currently institutionalise a voluntary, but non-accountable, cessation of income producing activity.

    Above this age, they tend to become recipients of income support. Part of the dependency ratio.

    This age 65 is a presciptive criteria. This blog may be an observation but offers no solution, and I can’t recall any of your previous blogs on this topic attempting to offer a solution.

    The age of ’65’, completely arbitrary, is the killer here. The solution is to adjust it upwards, and it needs to be raised immediately, and loudly, as the need to make this adjustment is urgent due to demographic pressures.

    If we made retirement 35 years of age, clearly we’d have a greater dependency ratio, and an unbearably expensive one at that.

    The required reform would be change the retirement age upward from 35. Age 65, is still the same issue, while not as pronounced, it is still an issue of calibration.

    • Solutions?

      Here’s a start …

      Less entitlements (health, welfare) for the ageing population, more taxes to provide for essential services from the future generations.

      Oh, and if I put my real cynical hat on – bailouts of the the too big too fails – funded by more austere measures through more taxes.

      Now, where have I heard all that before????

      LOL

      The Government will come to the rescue until the other countries don’t want to support its debt … from there, who knows. The inevitable fall of the PIIGS will give us some insight – likely in the next year of two.

      Incidentally I do not have confidence in the 4 major banks and that is another story, one that will be very hard to uncover – their balance sheets I suspect are still loaded with derivatives. About 4 years ago NAB had 2.5 trillion and the other 3 averaged about half that. Their market captitalisations are about 10% of that (would have to check). Now ask yourself – which side of these transactions are they on and what percentage move would wipe them out in a crash?????? Not much is the answer.

      It is plain ugly out there, maybe my cash will be put into the ground? At least spread across the 4 major banks – the Government would surely support them otherwise we would have an apocalyptic event on our hands.

      Phil

  8. keep in mind that spending patterns within age groups are also changing.

    my grandparents would sit around eating baked beans on toast waiting for pension day and splurge on packet of iced vovos for the grand kiddies.

    todays grand parents are touring the world/Australlia on super and wealth generated over the last 30+ years, buying ipads, blu rays, new cars, wining and dining etc.

    • You are out of touch – the majority of ageing people are at home and seeing their retirement days out – living of their welfare cheques. And I mean 80% plus.

  9. Great post UE – can’t wait for the follow ups. I’d have to agree with the last few comments. With the advent of super as well as the BB’s large share of real estate wealth, future retiree spending profiles will most likely be different to generations past.

    Quantifying that is the difficult part, but I really can’t see your typical, middle class BB accepting the twilight austerity there parents accepted. Unless some outside force (housing crash/depression) forces them to..

    • The fact that the BB’s will need to draw down on their housing equity to fund their retirement is a very bearish indicator for the housing market. The Boomers, after all, hold around half of the housing wealth. I will have more to say on this matter in my next post.

      As for Rusty Penny’s observation that the retirement age needs to be lifted significantly, I completely agree. We should also cut-back on retirement entitlements too. But don’t count on these reforms happening anytime soon. Even shifting the pension age to 67 was hard enough politically and this change won’t take effect until 2020, which is after many of the boomers will have retired.

      • The baby boomers are the first generation that we can’t uniformly generalise about because as a cohort their lives and experiences have not been uniform.

        That being said there have been some major changes over the past 30/40 years that affected the lives of the baby boomers more than the generation who retired before them:

        – Increasingly fragmented working lives (redundancies, casualization, unemployment/underemployment, etc.)

        – No Fault Divorce (obviously the married couples who stayed together have accumulated more wealth than the ones that had to split their assets)

        That’s why I think there will be a number of people whose retirement plan is the pension, though I don’t know how big these groups are statistically.

      • Good point.
        But I suspect the looming reality will be more complex that one simplistic outcome.
        We’ll see a proportion of baby boomers looking to capitalise on their housing asset/s.

        But equally, we’ll see many stay in their old family home, and live off savings or the income derived from investments (eg rental properties).

        Then we’ll see some who don’t have investments who will just scrape by, through their own means or with some assistance from the state.

        To me, this likely wide range of Baby Boomer responses suggests that the bulls and bears will both be wrong – the outcome will be somewhere in between for housing and the wider economy – which is the best outcome one could hope for (no bubbles, no busts).

      • The_Mainlander

        Baby Boomer’s with half the housing ownership = that makes me feel ill.

        Greedy ‘bastids’.

        I really do hope it pops now.

        TM.

  10. Also when the over 65 cohort is enlarged dramatically via the boomers, we also will have a new “voting bloc” paradigm. First time where approx. 25% of population is over 65 years old.

    A politicians work/worth will definitely be put to the test, circa 2020 onwards.. Imagine having 25% of the population on your case, 8 hours a day, 5 days a week. They have the time and the vote.

    • The_Mainlander

      Yes, but they will all be senile and make no sense with all the dribbling… “profit more profit I am a Boomer I deserve it as I am a Boomer”.

      I think the Gen Y’s will bleed em’ dry at this point!

      😉

      Yes, sarcasm.

      TM.

  11. Yes ,UE a back-ground bulge worth examination ,from retaining job positions
    to selling down asset prices…or drawing on the system ,too a long lived retirement…
    A Lump growing ..await your next economic biopsy ..JR

  12. Small Australia

    Scenario 3 would bring us back to the golden age where we had a small population and everyone knew his neighbour. The days where a man could buy a house on one income and have space for a hills hoist out the back.

  13. Regardless … option A, B or C. Australians will have to produce much more of what Australians consume.

    This is the ‘the answer’, the challenge and the danger that lay ahead.

    It just doesn’t matter how you re-pack this it is just how it must turn out, even if this means consuming much much less ‘stuff’.

  14. I would go for option C also – UE has posted much about supply of housing but ignored the demand side particularly via immigration. If BBoomers like me get burnt on the downside of the property bubble that’s great for our children.

    I agree past trends are irrelevant -more people will work past 65 and lets hope less consumerism.

    I determine my quality of life by my environment not with the trinkets I collect.

  15. Immigrants follow jobs and economic downturns necessarily reduce the rate of immigration.

    http://i51.tinypic.com/21jc6c3.gif
    This first chart shows that during the credit boom of the 1920s the USA enjoyed an ever increasing flow of immigrants. During the depression of the 1930s immigration fell dramatically despite the threat of war in Europe.

    http://i54.tinypic.com/2ugksd4.gif
    This second chart shows that the same phenomenon took place in Los Angeles County during the 1990s recession. Immigration turned into a net outflow as jobs vanished.

    According to data collected by the Australian Bureau of Statistics the story was the same during the 1890s and 1930s downturns. In most years immigration slowed to a trickle while in other years it became a net outflow.
    http://www.abs.gov.au/ausstats/[email protected]/mf/3105.0.65.001

    If Australia stumbles into the GFC unemployment will increase and immigration will decrease. If the downturn is severe enough immigration will turn into a net outflow as it did in Ireland after their housing bubble burst. Series C used the “low” estimate of 140,000 net immigrants per year. History suggests that number may prove to be optimistic.

  16. Alex Heyworth

    One issue I hope you are going to explore, DE, is the impact of baby boomers reaching retirement on the working population. We are going to need substantial immigration just to maintain the workforce, let alone expand it to provide workers for the mining boom.

    Of course, this could be less of a problem if our manufacturing continues to move offshore. I notice that Golden Circle’s beetroot canning is moving to New Zealand.

  17. Great conversation, and thanks Leith for beautifully presented data that blows the “pending labour shortage” claim out of the water. Ageing has its own fix for labour demand – less consumption. And as you so clearly show, higher immigration and birth rates don’t have much impact on demographics anyway – just a very hefty bill for infrastructure.
    So we lose some low-skilled, low-paid jobs in retail, and put a dent in our balance of trade deficit in the process, and free up people for higher paid jobs in health and leisure services, or even mining. Doesn’t sound like a calamity to me. (Sorry, my sympathy doesn’t extend as far as multinational retail giants.)
    What is shaping up to be a calamity is the increasing use of immigrant labour as the cheap option, leaving young Australians unemployed and untrained (but making the unemployment system so onerous that they drop of the list altogether, keeping official unemployment figures low), and population growth pushing housing out of reach for the next generation so they don’t have any assets to draw on in their own retirement. Rising property values are a pyramid scheme (the older generation feeding their present consumption on the future mortgage repayments of the young) and it’s in the process of crashing as we speak.
    By the way, current settings are more like Series A – Bernard Salt likes to play down the numbers, by confusing the issue between quotas and actual entrants – a confusion also played out in the above discussion, as the increase in emigration is only due to the turnover of international students, since the ABS’s redefinition of ‘immigrant’ captured more of them.
    Oh, and anyone who thinks Japan’s situation is something to be avoided hasn’t looked at GNI per capita.