A slowdown in global population growth could have a significant impact on real interest rates, according to a new study by JP Morgan.
As more old people save for retirement and fewer young people borrow for homes, cars, and education, demographics are weighing on interest rates in a trend that will continue. Jesse Edgerton, senior economist at JP Morgan and author of the report, told CNBC.
“The slowdown in population growth that we have seen for decades in both developed and emerging markets is one reason to expect lower real interest rates,” Edgerton told Street Signs Asia on Thursday.
His evidence? “The story of economic development really is,” he said.
Interest rates for the decline in developed countries
Japan, Europe, and the United States have all seen falling real interest rates over the past few decades as birth rates and gross domestic product (GDP) have fallen, while life expectancy has increased at the same time.
China is now “pretty far on this path,” said Edgerton, citing its slowing birth rate and aging population.
Emerging markets – where population growth continues to be higher – should catch up over time, he added.
A woman holds a baby in a local park on May 12, 2021 in Beijing, China.
Kevin Frayer | Getty Images News | Getty Images
That’s because money isn’t being used in the same way, which lowers returns and lowers interest rates, Edgerton said.
“Slow population growth essentially means that there is excess capital in the world. There is excess money looking for returns. And all the money people are trying to save – it will depress interest rates, it will depress returns on capital. ” he said.
Consequences for savings and investments
The changing interest rate outlook is affecting not only savings accounts and assets like bonds, which are directly correlated to interest rates, but also stocks and real estate. Falling rates could mean lower average value for money (PE), Edgerton said.
PE metrics are used to determine valuation, and high PE metrics can mean the asset is overpriced or that investors are predicting strong future growth.
If you live in a world with lower population growth, expect lower returns.
senior economist JP Morgan
“I think we should expect higher PE ratios to be the new normal in this slow-growing world,” he noted.
And while declining overall population growth isn’t necessarily a bad thing, Edgerton said, saving for retirement could get even harder in the future.
“If you live in a world with lower population growth, expect lower returns on your wealth as you save for retirement. You may have to set more aside,” he said.