The Decline of the Middle Class

This year has had its share of surprises. Brexit and Trump have both caught the world unawares and, although both the Brexit referendum and the US elections were separated by time and place, there is a common theme which provides an explanation for the results; the decline of the middle class.

It has been eight years since the global financial crisis. Economies have been characterised since then by low growth, low inflation, low interest rates and high unemployment. It has been a hard slog for the working class, particularly those in older age brackets who have found it more difficult to get work or who have seen their retirement savings impacted by low investment returns. There is an increasing level of disparity between the rich and the poor, which has led to an angry, disaffected working class looking for a different solution to their economic problems.

A research report from McKinsey Global Institute, published in July, 2016, called “Poorer than their Parents: Flat or Falling Incomes in Global Economies” found that the trend for stagnating or declining incomes in the middle class is not just occurring in the US – it is a global phenomenon. The report found that as many as 70% of the households in 25 advanced economies saw their earnings drop in the last decade. This compares to just 2% of households who had declining incomes in the previous twelve years. The middle class, who have had the expectation of their fortunes increasing over their lifetimes, have been hugely disappointed; hence their vulnerability to influence by radical politicians touting new solutions. We have seen evidence of this in the UK and the US, and other economies may yet have a similar experience. Increased polarity between rich and poor leads to unrest and pressure for political and economic change.