Slowing population growth across the globe could have a major impact on real interest rates, according to new research from JP Morgan.
With more old people saving for retirement and fewer young people borrowing for things like properties, cars and education, demographics are weighing heavy on interest rates in a trend that is set to continue, Jesse Edgerton, a senior economist at JP Morgan and author of the report.
“The slowdown in population growth, which we’ve been seeing for decades in both developed and emerging markets, is a reason to expect lower real interest rates,” Edgerton told “Street Signs Asia” Thursday.
His evidence? “The history of economic development, really,” he said.
Interest rates on the decline in developed nations
Japan, Europe and the U.S. have all experienced declining real interest rates in recent decades, as birth rates and gross domestic product (GDP) have fallen, and life expectancy rates have risen in tandem.
China is now “fairly far down that path,” said Edgerton, referring to its slowing birth rate and aging population.
Emerging markets — where population growth remains higher — can expect to follow suit as they develop over time, he added.
That’s because money is not being put to work in the same way, driving down returns and interest rates, said Edgerton.
“Slow population growth essentially means that there’s excess capital in the world. There’s excess money searching for yield. And all that money that people are trying to save — it’s going to push down interest rates, it’s going to push down returns on capital,” he said.
The shifting interest rate outlook has implications not only for savings accounts and assets like bonds, which are directly correlated to interest rates, but also equities and real estate. Falling rates could mean lower average price-to-earnings (PE) ratios, said Edgerton.
PE ratios are used to determine valuation, and high PE ratios could mean the asset is overpriced, or that investors predict strong future growth.
