This is a sensitive subject, but the potential implications of any policies or decisions have to be taken into account if we are to project risk-rated investment returns with accuracy.
The arguments in favour of liberal migration from a purely economic point of view are predicated on it enabling greater economic growth. According to academic studies from between 1984 (Hamilton and Whalley(1)) and 2007 (Klein and Ventura(2)), the removal of all barriers to labour mobility could lead to a one-off total increase in the global economy of between 67% and 147%.This contrasts with the World Bank’s estimate of just 2.1% being generated by a removal of all trade barriers to goods and services(3).
This view has to be tempered with at least two key points. Firstly, low-skilled immigrants are likely to put downward pressure on wages for the jobs that they can do in their destination country. So the global benefit and sharing of wealth comes at the cost of the richer country’s workers having to compete with lower paid workers from other countries. This threat can help to promote separatist politics such as we have seen with President Donald Trump’s inclination to renegotiate international trade deals, and the rise of nationalist politics across Europe particularly in 2016.
The second consideration is that of pressure on social provision such as schools and hospitals. According to the Organisation of Economic Co-operation and Development(4), employment levels for immigrants tend to be lower than those of native citizens across Europe. The perceived increase on social welfare costs is another motivation for people of recipient countries to want to limit immigration. It should be noted though, that the net effect of EU immigrants in the UK has been calculated to be a positive net contribution of around £4 billion, while non-EU immigrants cost around £118 billion. Both of these are eclipsed by native Britons who’ve cost the fiscal purse around £590 billion(5).
As always, the reality is probably somewhere in the middle. This would suggest that the net benefit of migration to the overall global economy is substantial but not without localised sacrifices.
Anti-European Union and anti-business political sentiment has subsided since 2016, but it has the potential to flare up at any time. As a result, the benefits that we believe open trade would bring are somewhat precarious, and this has some influence on how we see growth over the coming years.
1. Efficiency and distributional implications of global restrictions on labour mobility calculations and policy implications’, Bob Hamilton and John Whalley, 1984
2. ‘Total Factor Productivity Differences and the Aggregate Effects of Labor Mobility in the Long Run’, Paul Klein and Gustavo Ventura, 2007.
3. Source : ‘Three demographic megatrends’, BCA research 27 October 2017.
4. OECD International Immigration Outlook, 2017
5. University College London study in 2014 covering costs between 1995 and 2011. Source: Fullfact.org
The final demographic trend in our series is one in which levels of trust and mutual understanding are falling. The term ‘inclusive growth’ means that everyone participates in, and benefits from, the economic system. It is far from clear that this has occurred in recent decades leading to large swathes of ‘winners’ and ‘losers’. In the US, for example, not only have Democrats and Republicans become more ideologically divided(1), but the overall trust in mass media has fallen(2).
On top of this, there is evidence of a sharp decline in the perceived value of democracy. According to “The signs of democratic deconsolidation”(3) the proportion of people saying that it is “essential” to live in a democracy has fallen over the 50 years after the 1930s from around 80% to 60% in the US, 75% to 30% in Australia and 70% to 30% in the UK.
Together these points could indicate an increase in fear and the need for self-protection. Crime rates have started to increase in the US over recent years, although they have yet to reach the levels recorded by the Federal Bureau of Investigation between 1997 and 2010(4).
The basic point is that all forms of economic exchange require some degree of social cooperation and support. Humans are after all cooperative creatures that used to hunt together(5).
We are defined by the groups we belong to; whether our families, our clubs or even our area of origin. These groups form our identities and influence our behaviours.
Economically successful societies manage to share the economic gains across the groups, which maintains democratic support and legitimacy for liberal and pro-growth policies. Where groups are excluded from growth, resentment builds-up possibly leading to fragmentation and economic policies which run counter to our investment interests.
While this is something of an extreme view, there is the potential for a degeneration of social cohesion to undermine economic growth. If people are losing trust in their governments and fellow citizens, then the movement towards political extremism could grow and that is bad for both society and the economy.
Therefore, we are watching all four demographic mega-trends, and in particular how they interact with each other, to help us anticipate what the future holds for society in general and, more specifically, investors.
We will continue to monitor these trends to see how they affect inflation, savings and the spread of economic benefit. If governments, businesses and central banks respond with agility and accuracy, the positives could outweigh the negatives, providing fairly broad investment opportunities. If not, then the emphasis is more likely to be focusing on managing levels of risk relative to potential returns.
1. ’The partisan divide on political values grows even wider: Partisan divides over political values widen’, Pew Research Centre, October 2017.
2. ‘America’s trust in mass media sinks to new low’, Gallup News source via BCA Research from Art Swift, September 2016.
3. By Vascha Mounk and Roberto Stefan Foa in the Journal of Democracy, by the New York Times, November 2016.
4. Federal Bureau of Investigation, ‘Crime in the United States 2016’, sourced January 2017.
5. ‘A cooperative species: Human reciprocity and its evolution’ Samuel Bowles and Herbert Gintis, Princeton University Press, 2013.
Forecasts of future performance are not a reliable guide to actual results in the future, neither is past performance a reliable guide to future performance. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed. Any views expressed are our in-house views at May 2018. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. This information may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.
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