Megatrends Revisited

Last Wednesday, we held the first in our new series of Spring Masterclasses focussed on the seasonally apt theme of change. Kicking things off, our very own investment guru Radostina Dencheva revisited the findings of her paper on Megatrends – a topic she has been keenly researching since 2017. Our star guest speaker, Saul Humphrey followed with an analysis of the related challenges and solutions for the built environment.

Radi introduced the audience to the long-term structural drivers of change in the economy, markets and policy, otherwise known as megatrends. These are demographic, environmental, and technological drivers which explains the journey to where we are today. There was a brief discussion of how the pandemic has influenced these big drivers for change.

Following this, Radi spoke about the case study of Japan. The country of Japan is around two decades ahead of Europe and the US in terms of its ageing population. This means we can use some of their experiences as a proxy for what we could expect in the future. One conclusion we can draw from demographic drivers in Japan is that financial crises occur at demographic turning points. In Japan, the working population declined in the face of low growth and low inflation leading to the stock market crash in 1990. Government debt ballooned via quantitative easing, entrapping them in a deflationary cycle lasting decades until only recently, where they have seen an increase in inflation again.

Demographics drive structural change because GDP growth is affected by two demographic factors: population growth and productivity growth. We need the population to increase through either migration or workforce participation and productivity to increase through urbanisation, re-skilling and education, or technology and infrastructure improvements. However, the UK labour force is shrinking post-pandemic. ‘The Great Resignation’ caused by the Covid-19 pandemic, was a result of workers going on long-term sick leave and an ageing population. This has also caused an increasing amount of pressure on public pensions, healthcare and thus Government debt.

Building on Radi's presentation, Saul also touched on the challenges the construction sector is facing due to demographic shifts. Citing himself, Saul says that he is young for the construction industry (believe it or not!). Builders are ageing and we’ll likely see a large number of construction workers retiring in five to ten years. Unfortunately, it will be difficult to replace the retired construction workers in Norfolk, mainly because there are no degree programmes for construction offered in the county. As a whole, the construction sector is facing problems with low productivity, low predictability, low margins and a poor culture and image. Ultimately, they need to “modernise or die”.

The big question Saul asked of the audience was ‘Will the “Permacrisis” and “Megatrends” shape construction’s future (or are they already having an effect)?’ The permacrisis refers to the long period which has stretched across the pandemic, climate change and war.

Moving onto the environmental drivers of change - sustainable development must meet the needs of the present without compromising the ability of future generations to meet their own needs (National Intelligence Council, 2016). But this is difficult when humanity is using the planet’s resources 1.75 times faster than it can regenerate them (Global Footprint Network, 2019). Combining the finite resources on earth with the impact of climate change, the task of scaling up sustainable energy production is a challenge as it requires mining more metals and minerals than combustion-powered technology.

The construction sector contributes towards this issue because the built environment accounts for 38-40% of global emissions. Interestingly, if the cement industry was a figurative country, it would be the third largest emitter in the world behind China and the US. Saul’s research found the largest risk we face at the moment is the cost-of-living crisis but in ten years, the top four risks will be entirely environmental.

Saul put forward some thought-provoking questions about growth. A brave man who is perhaps playing a dangerous game with Richard Ross in the room. While Liz Truss didn’t stick around long enough for Saul to get a photo with her, he challenged her idea of growth. Growth, growth, growth…? Do you need to build a new building at all? Can we have perpetual growth on a finite planet? Is sustainable development the answer? Or if you say it quietly, even degrowth? (An argument for another time). Richard contested what Saul meant by growth as growth is different to consumption.

When it comes to technological drivers of change, Saul spoke about the digital support we can offer in light of an ageing society. In 20 years, time, we’ll see an 18% increase in the number of over 65s in Norfolk. One of the solutions to meet this demographic change is care villages, with one planned at Colney Hall on the outskirts of Norwich. The project will seek to embrace intergenerational living and support the increasing demands for environmental and demographic sustainability by incorporating technological advancements.

Radi pointed out that while the adoption of new technology is accelerating if we look at whether the pandemic made any difference – yes, it did as it highlighted long-term trends.

The main conclusion which came from the discussion following Radi and Saul’s presentations was the method of how we can solve the issues deriving from megatrends. If the affordability of environmentally sustainable homes is a problem; why have their costs increased to an unsustainable level? Do we need reform in planning policy to allow for more accessibility?

One of the problems raised was that we don’t include the cost of externalities in the price of items. For example, pedestrians aren’t compensated for breathing in the harmful pollutants that cars produce as they walk down the pavement. If the cost of this negative externality were included, the price of cars would skyrocket. This would force a significant behavioural change and encourage more people towards bicycles as their relative price would decrease. However, the UK is the third most individualist society in the world. This means that people care more about themselves rather than as a collective. Therefore, it doesn’t seem feasible to force people to pay for the externalities they cause to those around them.

We really appreciate everyone’s attendance, contributions, and involvement with our masterclasses, and hope that everyone enjoyed the session.

If you would like to know more about our upcoming events, find out more here.

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