Blog: You, us, everyone

Wages are higher, home prices are higher, and equities are higher. According to a Charles Schwab research analysis, Americans think it takes $2,5 million to be considered wealthy. This is a 13,6 % increase from last year reflecting the emotion-fueled impact of inflation, higher interest rates, and general economic stress.

Unsurprisingly, the definition of being considered wealthy is skewed. The more one advances in age, the higher the bar. For instance, baby boomers consider themselves wealthy, provided they have accumulated net assets of $2,8 million while Gen Z’s consider having $ 1 million as being wealthy. Similar stats are available in other regions; yet, the US analysis is remarkably significant and uniform. More, while not apparent, there is a direct link between wage, origin, and age, which brings us to the present job market.

The global job growth was relatively solid and accompanied by some wage growth. However, recent data suggest that the past robustness is lacking strength, which puts pressure on Central Banks to cut rates (start for the FED), or do more (the ECB and the SNB). As evidenced by the Swiss market, borrowers have benefited from declining costs since the beginning of this year. Recent correcting suggests that the market is indeed anticipating another move by the SNB.

To engineer a soft landing, Central Banks consider data such as inflation, retail sales, and jobless claims. Based on their findings, past cycles, and anticipation, the monetary policy will be adjusted. For now, the market is expecting the FED to cut rates to +/-3.25% by the end of next year. This outlook assumes that the labor market remains healthy, which in turn results in supportive consumer spending.

In Developed Markets, consumer spending absorbs a little more than 60% of the global economic output. This ratio varies considerably regionally and is strongly impacted by the predominant social setup, the job market dynamics, and interestingly, migration.

In an efficient and almost borderless world, people move from lower-income regions to higher-income areas thereby contributing about three-tenths of a percent per year to the growth of high-income economies. This trend can be observed in the United States of America for more than the last 50 years and in Europe ever since in the introduction of the Schengen Agreement. The border-free Schengen Area, effective since March 1995, guarantees free movement to more than 425 million EU citizens. In recent years, the migration trend has been impacted by the war in Syria (2015), Covid (2020), and the war in Ukraine (2022). In the case of the European Union, all three events have so far generated a positive long-term impact.

How does immigration affect an economy?

Immigration can boost both aggregate supply and aggregate demand. The relative importance of those two affects the labor market and consumption. Consequently, provided the right emphasis is given, there is wealth creation and social welfare within a soft inflationary environment. In case there is a one-sided approach, aka focus is on providing social benefits, immigration results in global wealth destruction, excessive government spending, and ultimately, it will favor a right-populist environment.

While there are some immediate impacts, i.e. higher consumption of staples, other effects will play out over time as people move up the social ranking. One of the most prominent examples of success in this field is Switzerland. Immigration results in durable consumption and capital investments such as housing which brings us back to the starting point of wealth creation and capital preservation.

Economic theories generally assume that economic growth is achievable over the long term (the famous “potential growth”) and depends on the availability of the labor factor (i.e., the number of persons available for work), on the availability of the capital factor (plant and equipment), and on the productivity of these factors. Empirically, over the very long term, there appears to be a very close correlation between global population growth and growth in economic activity. That theory has held up to recently.

In the past one was considered successful upon having a job that allowed one to cover for family and housing. This success factor came with a cost, i.e. making long working hours, commuting, and spending focused on durable goods. Gen Zs approach is different. They are focusing on a perfect work-life balance, and discretionary spending such as life-entertainment; long-term wealth creation is not key to them. This new baseline is expected to have a lasting impact on economic growth, it will impact how government debt is made and paid off, and it will impact population growth which already has turned negative in recent years in many developed market countries, provided one does exclude immigration.

It is estimated that there was a net immigration of about 3.3 million people to the US in 2023. This is most likely the reason why the US economy has been resilient ever since the start of Covid.

Migrating is an old thing but the movement observed during the past years was well above historic averages. Looking ahead, research suggests that the flow of workers to fall because of new restrictions to be administrated. The departing workforce creates a vacuum that needs to be filled somehow; market participants can’t tap the job market next door forever, be it because of lacking competencies, eventual government restrictions to move, or a general void of workers. If such a scenario becomes a reality, it would imply a lasting economic slowdown and possibly higher inflation in the economies where the supply boost has dominated.