Paul Hodges

Paul Hodges (born 1952 in London, England) is an experienced businessman and recognised expert on the impact of demographics changes on the economy. He is chairman of UK-based strategic consultancy International eChem, which he founded in 1995, and of NiTech Solutions Ltd, an engineering company originally spun out from Heriot Watt University, Scotland. He advises a number of fortune 500 companies, investment banks and fund managers. He holds a BA (Honours) from the University of York and studied Managing Corporate Resources at the International Institute for Management Development (IMD) in Lausanne, Switzerland in 1989.

In 2003 Hodges won an individual award in the Financial Times/International Finance Corporation ‘Pensions for the Future’ global competition. Organised in conjunction with a number of major global pension funds, Hodges won his award for his analysis of how to ‘Manage Pension Funds as if the Long-Term Really Did Matter’. (Financial Times, 13 October 2003).

From 1978-1995 Hodges worked for British chemicals group, Imperial Chemical Industries (ICI) and from 1991-95 was an executive director of ICI's chlor-chemicals division with sales of £650 million, 3,000 employees.

Hodges became interested in demographics and their impact on the economy in the mid-1990s, when studying the work of Salomon Smith Barney’s Alan R Shaw, then the recognised doyen of Wall Street analysts. Shaw’s analysis, as presented in an interview in US investment magazine Barrons (‘The Big Picture’, July 27, 1998) highlighted the strong linkage between the performance of Japan’s Nikkei stock index from 1966 onwards and the US S&P 500 index from 1980 onwards.

Shaw’s declared his aim in the interview as being “to set clients thinking about whether some of the demographic trends in the US at that point were similar to ones present in Japan 13-14 years earlier. And whether they are some of the reasons they have been having such problems over there in the Nineties. Because it is an aged economy, and aged population. Whether interest rate trends were comparable”.

Hodges developed his research over the next few years. This led him from 2006 onwards to issue increasingly urgent warnings about the potential for a financial crisis, which he saw as likely to be caused by over-leveraging in the western world, particularly in the housing sector. He expressed his views in the Financial Times and in his blog, subsequently earning recognition as one of the few who had correctly foreseen the coming crisis. He then went on to develop the first fully consistent analysis of the impact of ageing populations on economic growth rates as co-author of the eBook ‘Boom, Gloom and the New Normal’.

Boom, Gloom & The New Normal

Hodges co-authored Boom Gloom & the New Normal with John Richardson, Asian director for ICIS Training, the global chemicals information and pricing service. It was published online by ICIS (part of Reed Elsevier PLC) in monthly instalments between 2011-2012.

The main premise of the book is that demographics drive demand. It highlights how the Western baby boomers (born between 1946-70) drove an economic supercycle between 1982-2007 as they entered the peak consumption ages of 25-54. The average Boomer joined this cohort in 1983, from when the world began a steady economic boom and financial markets rose to all-time highs. But in 2013, the average Boomer leaves this group to join the 55+ age group. This is a period when spending slows as people’s needs focus on replacement rather than new products, whilst incomes fall as they approach retirement.

The book argues that as this generation moves beyond its peak spending years, it is ushering in a new normal for the world economy, which will be characterised by lower growth and much greater volatility, uncertainty, complexity and ambiguity. Hodges and Richardson describe this as a VUCA environment, an acronym derived from US military vocabulary.

They point out that 272 million Westerners, 29% of the population, were already over the age of 55 in 2010, and the numbers in this cohort are forecast by the UN Population Division to 364 million by 2030, a 34 per cent increase. This cohort has never before existed in large numbers, as Western life expectancy was just 50 years as recently as 1900 (Angus Maddison, The World Economy: A Millennial Perspective). Most have not saved enough money to enjoy the standard of living which they had expected in retirement, and so spending levels must inevitably decrease, whilst savings levels increase. Household consumption is around 60% in most Western countries according to the World Bank, and 71 per cent in the USA. Thus economic growth must almost inevitably slow from the peak levels seen during the supercycle.

The baby boomer generation can expect to live another decade of life compared with previous generations due to healthier lifestyles. The authors say changing consumer patterns resulting from this demographic trend will also open up new markets for businesses. The authors highlight food, water, mobility, health/hygiene and shelter as being key needs for the future, along with products and services required to support the trends of increasing life expectancy and reducing carbon footprint.

‘Boom Gloom & The New Normal’ forecasts a number of macro-changes will have occurred in the global economy by 2020 as a result of these demographic changes. These include a major shake-out in Western consumer markets as consumers increasingly look for value-for-money and sustainable solutions, and focus on ‘needs’ rather than ‘wants’. It also expects taxation to have been increased to tackle public debts, whilst trade patterns and markets will have become more regional.

Hodges & Richardson also argue that emerging economies cannot be expected to replace the decline in demand from the West's ageing populations. China, for instance, also has a rapidly ageing population due to its one child policy introduced in 1978, which has reduced births by 400 million. The book also highlights that contrary to popular belief, developing countries such as China are still very poor by comparison with Western standards. Asian Development Bank data shows, for example, that 96% of China’s population earned less than less than $7,300/year as recently as 2007. Only a very few earn average Western salaries of $25,000/year or more.

Demographic impact on financial markets

Hodges has frequently argued that the New Normal means that investors will become increasingly concerned about return of capital rather than return on capital. In consequence, he believes countries with high credit ratings will continue to see lower interest rates and lower yields on government bonds. Hodges also believes that it will no longer be possible to obtain average returns of 8% or more a year from the major world stock markets, as seen during the supercycle, due to the global economy’s much lower growth potential.

He has also warned that quantitative easing measures from global central banks increase the chances of recession by driving up the costs of key commodities such as oil, as institutional investors seek a ‘safe haven’ in so-called hard assets due to fears of US dollar devaluation. Thus the price of oil reached levels in late 2012 and early 2013 that have traditionally triggered recessions, as high oil prices reduce the amount of disposable income available to consumers in Western and emerging economies.

Opportunities from the new normal

Hodges argues that the growth of the over-55 cohort provides new opportunities to supply new products and services to currently under-served markets. He also argues that companies who focus on providing necessities at affordable prices potentially face a bright future. This is a reversal of the tendency towards developing premium-priced products focused on the middle market, which was a major source of profit from companies in the supercycle. Hodges also sees tremendous potential in frontier markets such as Africa, which have younger populations and could create new centres of growth for the world economy. He cites Africa as an example where there are 300 million people who have now moved into earning $2-10 day, which represents a market opportunity.