Post on 18-Jan-2016
Long-run equity returns 1.
• In the long run total return on equities approximates to initial dividend yield plus growth rate of dividends and growth rate of dividends is dominated by growth rate of national output.
• Economic growth is fundamental to the capital gains that make equities attractive relative to higher-yielding investments, such as bonds, convertibles or property.
Long-run equity returns 2.
• Assume the following:-• 1. Productivity growth 1 1/4% a year • 2. Employment contracting by 1/2% a year• 3. Ratio of profits to GDP falling by 0.2% a year• Then, what is the trend rate of profits growth, and
so of long-run capital gains p.a. in real terms?
• Answer = 1/2% a year
Productivity growth in the Euro-zone 1996 - 2000
• 1996 1.1%
• 1997 1.6%
• 1998 1.2%
• 1999 0.9%
• 2000 1.3%
• 2001 1/2% ?
• Average growth rate of productivity is little more than 1% a year.
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
EU15 Productivity growth Trend line
SLOWING PRODUCTIVITY GROWTH IN THE EU
What do we mean by “Europe”? 1.
“Europe” is to be understood in avery broad geographical sense. Itincludes 38 countries most ofthem with population under 10m.and of little economic importance.Their total population in 2000was 807.3m and working-agepopulation was 537.7m.
o
What do we mean by “Europe”? 2
334222
150
102
81
55
66
42
59
39
59
38
58
39
0
100
200
300
400
500
600
700
800
Total population Population of working age
m.Italy
UnitedKingdomFrance
Turkey
Germany
RussianFederationOther
Europe’s demographic problems 2000-2030 1. Chart shows projected population of working age for Europe as a whole. Projection based on 1994 World Bank data
538551
537
514
490
500
510
520
530
540
550
560m.
2000 2010 2020 2030
Europe’s demographic problems 2000-2030 2. Chart shows projected falls in population of working age, 2000-2030,%. Projection based on 1994 World Bank data
-24.1
-21.5
-15.2-14.1 -13.6
-7.1-5.7
-4.0
-30.0
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
Germany Italy Spain Netherlands BelgiumRussian
FederationUnited
Kingdom France
Europe’s demographic problems 2000-2030 3. Chart shows projected fall in population of working age in all those countrieswhere it is falling. Decline is about 1/2% a year.
436 435
415
388
360
370
380
390
400
410
420
430
440 m.
2000 2010 2020 2030
Europe’s demographic problems 2000-2030 4. Chart shows projected fall in population of working age in “falling” countries and rise in “rising” countries, between 2000 and 2030.
436 388
102 126
0
50
100
150
200
250
300
350
400
450m.
2000"Falling" countries
2030 2000"Rising" countries
2030
Another view: Latest UN assessment of change in Europe's working-age populations, 2000 - 2050
-45.1 -44.4 -44.1
-30.2
-22.4
-17.3 -16.1
-11.8
-50
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
%
This assessment was made in 2000, after substantial migration - mostly from east to west in Europe - in the mid- and late 1990s.
WORKING-AGE POPULATION - W. EUROPE Latest UN projections of 15 - 59 age group
0
10000
20000
30000
40000
50000
60000
in '000s
2000
2050
THE LATEST ASSESSMENT 1.Population of working age in millions, according to 2002 World Bank projections
100
130
160
190
220
250m.
Eurozone, as at start 2002
EU-15
THE LATEST ASSESSMENT 2.
EU Eurozone2000 229.6 185.92010 230.0 185.72020 220.0 177.02030 199.1 159.12040 177.3 139.92050 167.4 130.8
Population of working age (millions)
0
1
2
3
4
5
6
World
EU-15
Replacement ratio
THE DECLINE IN FERTILITYChart shows number of births per woman, on average
1.0
1.5
2.0
2.5
3.0
3.5
EU-15 USA
Japan
INTERNATIONAL COMPARISONSNumber of births per woman, on average
LABOUR FORCE PARTICIPATION - Big differences between nations
0
10
20
30
40
50
60
70
80
90
%
Total participation ratio, of 15 - 64 years old, in 1999
PARTICIPATION IN LATE MIDDLE AGE
0
10
20
30
40
50
60
70
80
90
%
Participation ratio, men, 55 - 64, in 1999
0
20
40
60
80
100
Old dependency
Young dependency
Working age population
EU’S DEPENDENCY PATTERNEU15’s dependents as % of population
70
80
90
100
110
120
130
140%
THE OVER-BURDENED STATENumber of people aged 19 and under, and 60 and over, as a percentage of working age population
Labour's productivity in a one-product economy - marginal product falls steadily with employment
because of diminishing returns
0
20
40
60
80
100
120
1 11 21 31 41 51 61 71 81 91
Units of output per worker
Straight line represents a naïve "production function"
Millions of workers
Distribution in one-product economy 1. Chart shows total rents and wages with 30m. people employed
0
20
40
60
80
100
120
1 11 21 31 41 51 61 71 81 91
Employment in m.
Uni
ts o
f out
put Wage, with given
employmentMarginal product oflabour
Wages
Rents
Distribution in one-product economy 2. Chart shows total rents and wages
with 60m. people employed
0
20
40
60
80
100
120
1 11 21 31 41 51 61 71 81 91
Employment in m.
Un
its
of
lab
ou
r Wage, with givenemployment
Marginal product oflabour
Rent
Wages
Wages and rents as employment grows Chart shows total wage and rental income,
with given production function
0
1000
2000
3000
4000
5000
6000
1 11 21 31 41 51 61 71 81 91
Employment, in m.
Units of output
Wages
Rents
Falling populations 1.What do they mean for economies?
• Fall in total population implies:
• 1. Reduced need for residential space
• 2. Sharply reduced need for new houses
• 3. Reduced demand for food relative to other products
• Fall in working-age population implies:
• 1. Reduced demand for commercial and industrial space
• 2. Sharp demand cut for new buildings
• 3. Reduced no. of journeys to work
Falling populations 2. What do they mean for profits?
• Labour shortages, rising marginal productivity per worker and rising wages
• Rising ratio of wages to national product
• Falling ratio of rents/profits to national product
• Rents/profits rising more slowly than national product
EMPLOYMENT IN EUROPE IN THE 1990sChart shows % change in employment
-4
-3
-2
-1
0
1
2
3
4
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Germany UK France Italy
Immigration into the UK, 1991-1999
Chart shows net immigration in thousands
73
35 35
109 109 9392
178 182
0
20
40
60
80
100
120
140
160
180
200
1991 1992 1993 1994 1995 1996 1997 1998 1999
Non-British entrants to the UK,1998, excluding visitors
0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000
Asylum seekers
Students
Other entrants