Booming to Economic Basket Case

Friday, 24 January 2020
Melbourne, Australia
By Selva Freigedo

In 1849, Charles Henry Harrod, a tea dealer, opened a small shop in Knightsbridge, London.

The shop, which he called after himself, would sell tea, but also coffee and groceries.

At the time, Knightsbridge was up and coming and Harrod’s developed along with the neighbourhood to become the iconic department store it is today.

Since then, Harrod sold the business. Today, it’s owned by the Qatari royal family.

These days, Harrod’s is a tourist destination, visited by 15 million people a year. With the motto Omnia Omnibus Unbique meaning ‘all things for all people everywhere’, you can truly find something for everyone at Harrod’s.

But, while the store is famous worldwide, there is something not many people know about it.

In 1914, the company decided to open an overseas branch in what today would look like a very unlikely place.

More on this after the markets.

Markets

US markets were mixed overnight with the Dow Jones down 0.09% to 29,160. The S&P 500 was up to 3,325 and the NASDAQ was up a few points to 9,402.

European markets were down with the German Dax down 127 points to 13,388 and the FTSE 100 down 64 points to 7,507.

In Asia, the Japanese Nikkei 225 is up 58 points at 23,853. The Hang Seng is down 431 points at 27,909.

Gold is down to around US$1,561. WTI Crude Oil prices are up to around US$55.60.

In 1914, just before the First World War started, the UK’s famous department store Harrod’s decided to open an international branch. At the time, the company had international stores only in Europe: Paris, Berlin and Manchester.

But their next opening was in a very different part of the world: Buenos Aires, Argentina.

Set in one of the most popular shopping streets in Buenos Aires, Calle Florida, Harrod’s new luxury store covered 47,000 sqm. And the store quickly became ‘the place’ to have afternoon tea, buy imports or visit the barber shop.

Why, of all places in the world, did Harrods decide to open a branch in Buenos Aires?

Well, because at the time, Buenos Aires — and Argentina — was booming.

At the beginning of the 20th century, Argentina was one of the 10 richest economies of the world, richer than France, Germany or even Spain.

It’s true, Argentina hasn’t always been the economic basket case you see today.

What was the secret to Argentina’s prosperity?

Simple: immigration.

Immigrants were choosing the buzzing streets of Buenos Aires, with its modern trams and European looking buildings to settle, and Argentina flourished.

Between 1881 and 1914, the country received around five million immigrants coming from Europe. They were escaping wars and epidemics, and came into the country in search of work and housing.

You can see the immigration numbers below. The first column shows net migrants as an annual average. The second column displays total country population in thousands and the third net immigration percentage per 1,000 inhabitants.

As you can see, much of the influx happened between 1870 and 1940 when the population increased five times, from three million to 15 million. Considering Argentina has a small population of 44 million today, that’s quite an inflow of people.

 


chart image
Source: Wikipedia
Click to enlarge
 

 

The impact of this massive immigration was economic growth.

New immigrants needed jobs, needed housing and supplies. It started a construction boom. In fact, many of the buildings you see in Buenos Aires today were built during that period.

That’s the power of immigration.

My point with all of this is to show you how immigration can affect the economy, and the importance of demographics.

While Australia and Argentina have had VERY diverging economic histories, they have quite a lot in common, too. They are vast countries with a small population, rich in resources and agriculture.

And much of Australia’s economic miracle has also been powered by immigration.

Australia’s population is growing quickly. It is expected pass the 37 million mark by 2050.

According to the Scanlon Institute, one in seven people in Australia today have arrived in the past 20 years. In Melbourne, the number is smaller, it’s one in four people.

According to a report by the Australian Treasury and the Department of Home Affairs titled ‘Shaping a Nation’, almost two thirds (59%) of our population growth in the last decade has come from net overseas migration (NOM). Namely students and skilled workers.

As you can see in the graph below, while natural population growth has been declining, much of the recent population growth in Australia has come from NOM.

 


chart image
Source: Shaping a Nation
Click to enlarge
 

 

All this population growth is making Australians’ standards of living better.

According to the report, Australia’s current migration program will add up to 1% in GDP growth for the period between 2020 and 2050. The report found that migrants improve Australian labour participation and productivity.

In fact, high immigration could have helped Australia avoid a crisis for decades. It could be one of the reasons for its 29 years of economic growth track record.

As the report noted:

There is considerable evidence pointing to the role of migrants in sustaining or fostering strong economic growth over the longer term.

The 2015 Intergenerational Report (Australian Government 2015) estimated that, over the 40 years to 2015, population factors contributed almost 18 per cent of the 1.7 per cent annual average growth in GDP per person. This was mainly due to the growth in the working age share of the population.

This suggests that migration helped the economy successfully weather the Global Financial Crisis and the slow global growth and poor economic conditions that followed.’

The large influx of people has boosted economic growth but has also had an impact on infrastructure, universities and even housing. It’s part of the reason why we have seen the crazy increases in property prices.

Australia has seen an increase in population growth in the last decade. It may have even managed to avoid the 2008 crisis because of it.

The thing is, we could see a slowdown if population growth slows significantly.

This is what we (Harry Dent and Selva Freigedo) do at Harry Dent’s Boom & Bust Letter.

We try to predict trends by looking at demographics and today’s consumers. We look at how they behave, where they like to spend their money and how our changing demographics affect spending.

After all, that is the definition of economics, the study of human behaviour and their relationship and interaction with money.

Today, the developed world is facing economic stagnation and huge demographic challenges.

We are already seeing the effects in Europe, the US, and countries like Japan…

In this scenario, Australia is one of the developed countries with a massive advantage over the rest, it has better demographics.

And, while the high property market bubble is a huge concern, it’s the reason why Harry and I see a lot of opportunity ahead for Australia in the years to come. We are looking to find those opportunities for you at Harry Dent’s Boom & Bust Letter.

Best,
Selva