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Crib to crash: do falling fertility rates signal recession?

Falling birth rates could be an indicator that another recession is due, says M&G bond manager Jim Leaviss.

 
Crib to crash: do falling fertility rates signal recession?
 

M&G bond manager Jim Leaviss has predicted a recession next year on the back of rising interest rates and a drop-off in the number of babies being born.

He pointed to research from the US that reveals a recession happens a few months after a fall in the number of women becoming pregnant.

Economists at the National Bureau of Economic Research, which tracked more than 100 million births in the US between 1989 and 2016, found fertility rates were an accurate predictor of economic downturns.

It found a rapid fall in the rate of conceptions starting several quarters before a recession begins. For example, conception rates had started falling several quarters before the 2007 financial crisis hit, despite optimistic polls of business leaders.

One author of the research, Daniel Hungerman, said: ‘The nature of each recession has differed and so what conversation goes on at the kitchen might be different, but I do think that people talk about the future when they try to have a baby and in aggregate they seem to do a good job thinking about it.’

The research found there was also a link between fertility rates and the scale of the downturn. Conception rates sank more quickly before the 2007 recession than before the dips in the early 1990s and early 2000s.

Leaviss, manager of  M&G's European Inflation Linked Corporate Bond fund, Global Government Bond fund, and Global Macro Bond fund, said it was not just conception rates that pointed to an impending recession.

‘We are due another recession,’ he said. ‘This is the longest expansion we have seen… global growth is very strong, with emerging markets stronger than developed markets, but it is long in the cycle and there is a chance of recession.’

However, he said investors should not be worried about markets plummeting in the manner of 2008's financial crisis.

‘[A recession] may be next year but it may not be dramatic,’ said Leaviss. ‘We are used to thinking of recessions like the great financial crisis but we may only see a slight recession.’

US president Donald Trump’s plans for growth and the appointment of a pro-business Federal Reserve chair in Jerome Powell, could see a recession delayed slightly.

‘Trump has his foot on the gas and that will delay [a recession],’ said Leaviss. ‘However, [Trump] is running a very big budget deficit and that causes its own problems, but it may be rising interest rates that will be the cause of the recession.’

Although central banks want to get interest rates to a higher level, Leaviss predicted the new Fed chair would follow his predecessor Janet Yellen’s stance for ‘this year and next year’, with the market predicting three or four rises. However, he said Powell was a ‘Trump appointment’ and Trump uses the health of the stock market as the gauge of how well he is doing.

‘If we saw another episode [such as the correction in January], we have to see whether interest rate rises would be put on hold because of the stock market,’ he said.

The path of interest rate rises in the UK are also important in determining a potential recession. Rates were raised to 0.5% in November for the first time in a decade and Bank of England has already warned they may need to rise sooner and more quickly than anticipated on the back of growth in the global economy and rising wages.

Leaviss (pictured) said although the increases were incremental and may seem small in isolation, they would have a dramatic impact on UK consumers.

He said UK homeowners could struggle if they saw the rate of their mortgage interest payments double.

‘It doesn’t have to be a big move but when you have a zero or negative savings rate there is no cushion to keep up with rising interest rates, so a doubling in mortgage interest rates from 1% to 2% is as dramatic as a rise from 5% to 10%,’ he said.

‘People have a bucket of money and they think of their mortgage payment as a number not as a percentage.’

4 comments so far. Why not have your say?

PaulSh

Feb 28, 2018 at 13:44

Seeing that we're only just starting to roll back the anti-recession measures instituted in the last recession, how exactly are we going to cope with another one? You can't cut interest rates by 2-3% to fight a recession if they haven't even got back up to 1% yet.

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Linda Green

Feb 28, 2018 at 16:45

Maybe just the end of the population blip caused by those that came from Europe as singles in the early part of the century, who later made families. It caused a big sudden rise in demand for school places.

As regards the 2008 recession, most ordinary people still think we are still in it. It certainly feels that way.

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Cojo 2004

Feb 28, 2018 at 16:55

"… so a doubling in mortgage interest rates from 1% to 2% is as dramatic as a rise from 5% to 10%,’ he said."

£200,000 mortgage (repayment type) over 25 years

@ 1% monthly payment = £ 753

@ 2% monthly payment = £ 848 difference = £93

@ 5% monthly payment = £ 1170

@10% monthly payment = £ 1817 difference = £647

£93 pm & £647 pm are as dramatic as each other ? I don't think so.

@ 5% monthly payment = £ 1170

@ 6% monthly payment = £ 1289 difference = £119

£93 pm & £119 pm are as dramatic as each other ? I'll buy that.O.K.

or have I got it wrong ................ please help

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Jim S

Feb 28, 2018 at 17:49

Some research shows a drop in the conception rate predicts recession. I get that. But where is the actual data which Leaviss is referring to, showing that conception rates have fallen? And is that data for conception rate in the US or is there evidence conception rates in the RoW have dropped? We don't learn any of that from this article.

Has China's birth rate dipped since they loosened their 1 child policy? Really?

Has Japan's recent growth been because Japanese have become more fertile? Really?

It would be quite nice to understand the facts which Leaviss has based his opinions on.

PS. Cojo, interest rate doubling effect only works on the interest part of the mortgage, not the repayment part.

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