Last week, a number of news outlets in the UK ran stories about England’s “lost and indebted generation” – stories based on data put out by the Student Loans Company on how graduate earnings had fallen since the beginning of the financial crisis. Indeed, owing to higher education funding cuts and therefore rising tuition fees (public spending cuts are common at the end of the economic cycle, as the cost of bailing out the banking system compounds the problem of sharply reduced tax revenues), the research found that in real terms earnings for the young men and women graduating into the last recession had fallen by 12 per cent compared to the pre-crisis cohort of graduates at the same stage in their careers and that on average they owed 60 per cent more in student debt. Further research from the US also suggests that the earnings of those graduating during recessions usually take a decade to reach the same level of earnings as their more fortunate peers who graduate when times are better. This is not a pretty picture.
We at Ascendant Strategy will freely admit we are not experts on higher education. But we want to take the opportunity to show you how powerful knowledge of the economic cycle can be. We view the major economic trends through the lens of a repeating 18-20 year cycle and can therefore see how these develop between from the peak of one cycle and the next. The most challenging time for an economy is at the cyclical peak and subsequent downturn, which occurs on average every 18-20 years. Other recessions are not as severe. This affects all aspects of an economy, not just those areas that are Ascendant Strategy’s primary focus: making sound and profitable investment decisions. And so we know that, while challenging, the experience of the current generation is not unique. During last similar cyclical downturn in the early 1990s graduates were similarly affected, with graduate unemployment peaking at 12 per cent in 1992 (see ONS stats), before falling through the recovery and subsequent boom; and then again rising through the global financial crisis to a peak in 2010. In Japan, the situation was even more severe for graduates in the 1990s, with many labelling the dramatic fall in opportunities as the “ice age”.
We forecast that the next major downturn will occur in the middle of the 2020s. Until then we expect a period of continued recovery and prosperity: in fact we think this next cycle may involve a bigger boom than the past one. (Why? We see a lot of promise in the current rapid technological innovation, its application to industrial processes, potentially new and cheaper sources of energy and so on). This is good news for those with children in university now, particularly those in innovation sectors: when they graduate things will be better and the opportunities they are looking for will be out there. On the other hand, if you have a child who will be entering university around 2026 and/or the labour market around 2028, he/she may face the same problems as the current cohort, i.e. limited new jobs and an oversupply of qualified graduates chasing them.
So what can you do about it? Well such downturns cannot be avoided, so one thing you can do is to ensure that your child is as competitive as possible in the labour market. We have other ideas for how to arrange your affairs to take account of the cycle – indeed, this is why Ascendant Strategy was set up.
Also, make sure your child is careful on the choice of profession because, as our research shows, some sectors are far more affected by these cyclical downturn than others.
And now you have yet another reason to make sure your children do their homework….
Image copyright: Sarah Klockars-Crauser