How are underemployment, the rise of populist governments and Chinese economic growth interwoven and how will they impact the domestic and global economies?
Australia’s hidden youth unemployment crisis
While Australian youth unemployment is at a very low point, underemployment (combination of unemployed with those that can’t find the amount of work they want) has been at or near its 1990s recession peak for nearly five years as shown below. Similar if not worse conditions have caused uprises in southern Europe, the US and UK, which in turn is now driving significant volatility in equity markets in particular, and poses a long term threat to China and therefore Australia.
As mentioned last week, underemployment has become the more relevant measure of economic health in recent years. In the 1990s recession, there were around the same number of underutilised youth, a measure that includes both unemployed and underemployed. Around 25-30% of Australia’s youth could not find the work they needed.
Today that figure is around the same level. More worryingly, this has now been the case for over four years, compared to the relatively short spike in the 1990s. Back in the 1990s, there were two people underemployed for every three unemployed; now there are five underemployed for every three unemployed.
Underemployed youth levels have risen from 9% in 1991 to 18% in 2018, and that level continues to rise despite the encouraging fall in unemployment. The structure of our economy is changing and it is leaving a generation of youth behind.
Source ABS
Youth unemployment and the rise of populism
Australia isn’t about to see the rise of extreme right parties to government as a rising number of global economies have, but the shift is still noticeable. The major parties will increasingly struggle to form a majority government resulting in less ability for successive governments to make the structural changes to our economy that have kept us in good shape in the past 25 years.
Europe, on the other hand, is in the grip of political instability at the bloc level and several if not most nation levels. High youth unemployment has been a feature of southern Europe since the GFC. Spain’s youth unemployment hit 50% in 2010 and was still 44% by 2016, with Italy’s at 36%, France’s at 20%, but Germany’s just 7%.
The natural reaction to all of this is a revolution of some scale. Southern Europe objected to Germany’s control of Europe and enforced austerity that made unemployment worse. Populist parties arose in France, Italy, Spain, Austria and even Sweden. Most recently the far right party was swept to power in Brazil, where youth unemployment has reached similar levels to southern Europe.
Global youth unemployment rates
Middle class declining real income
It isn’t always youth unemployment rising that is a predictor of this populist, anti-globalisation movement; low income growth in the middle classes is another strong indicator. The median household in the US and UK had suffered falling real wages for more than 10 years before the GFC hit, and were then told that the global financial system had blown up, so now they would be unemployed.
In Britain, the world was shocked when Brexit won the popular vote. Then five months later, the uber-marketer Donald Trump capitalised on this revolution and shocked the world by winning the US Presidency. Have a look at two of the critical states that handed victory to Trump: Wisconsin and Michigan, compared to the states that swung toward the Democrats.
Median annual income for key US states
The threat to China
History again tells us that this rise of populism shouldn’t be a great surprise. When Britain was world economic leader, it used its power to boost global trade, resulting in rapidly rising wealth in Britain but then unaffordable wages and offshoring of jobs, inevitably the working class rose. Globalisation was rejected by Britons and they voted in a populist government. World trade fell sharply and the result was the world economy lacked a leader until the US took over post WWII.
China’s biggest problem, as we have been pointing to since prior to Trump’s ascendency, is that this anti-globalisation trend could not come at a worse time. China needs to maintain GDP growth in order to maintain employment and income growth, which in turn it needs to maintain social stability. Social stability is vital to the maintenance of the autocratic rule of the Communist Party.
This is where the problem begins. To maintain GDP growth, they either need to continue to invest in infrastructure, property and industrial capacity, or they need to increase the trade surplus. In the environment in which the US and Europe are rising against global trade, increasing its trade surpluses will be extremely difficult. That leaves more investment, but that requires more borrowing. China already has a debt to GDP ratio of more than 280% between the government, state owned enterprises and private sectors.
China has backed itself into a corner and is now under attack from populist shifts against global trade. They can borrow more and risk economic instability, or they can let GDP growth slow at a faster rate, and risk economic instability. Given the choice, Beijing will repeatedly choose more debt and push the problem down the road, just as they announced early this month in response to the slowdown caused by Trump’s trade war.
Picking the trends is easy - picking the timing much harder
Picking when globalisation would have this effect is impossible as this is a 100 year cycle. But the impact will eventually impact global equity and currency markets, along with several local property markets when Chinese capital retracts. The early stages of this are probably being seen in Australia and the US now, but if so, they have several years to pay out just yet.
For long term investors though, picking the exact time is not important. Positioning yourself to avoid unnecessary volatility and profiting from the inevitable shift from high risk assets to high income assets is far more important.
Predicting this shift has not been that difficult if you look at the structural issues that have always caused them: society’s pushback against globalisation. There are more visible signals such as youth unemployment and the lack of middle class wage growth. What happens after such long periods is young adults can go years without being fully employed, creating social issues for them and the more vulnerable communities they often live in. The same goes for years of working class families in the world’s richest countries experiencing declining standards of living, despite the headlines of their country’s prosperity.
As shown above, Australia may well be facing its own uprising of populism if we can’t address the significant issue of low wage growth and rising youth underemployment. This pattern of rising populist politics, the rise in the voting power of the middle class, and a push back against immigration and globalisation, has a long way to run yet, and will only be exacerbated by further job losses coming from the digitalisation of the global economy. And for Australia the real danger is that this comes at the same time as China, our largest trading partner, is caught between rising debt and falling trade.