How the global demographic shift could affect interest rates

The decelerating pace of worldwide population growth could impel downward movement on real interest rates, according to a JP Morgan senior economist.

In an interview with CNBC, Jesse Edgerton of JP Morgan said that the ongoing global trend of older people focusing their resources on building up their retirement savings is weighing heavily on interest rates.

“Slow population growth essentially means that there’s excess capital in the world,” Edgerton said. “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.”

In turn, this will likely drive higher price-to-earnings ratios, which Edgerton is expecting to be “the new normal in this world of lower population growth.”

“If you’re living in a world with lower population growth, you should expect to earn lower returns on your assets when you’re saving for retirement. You might [need] to set aside more,” he added.

These developments have accompanied reduced borrowing demand among younger people, who are not entering home ownership in sufficient numbers, Edgerton said.

This is compounded by mounting income disparities, as recorded by Statistics Canada recently.

“Canada used to be a place with a low level of inequality, where kids moved up classes. By the time millennials were born, that was no longer the case. Their parents faced more inequality, and a child’s economic outcome was more closely tied to their parent’s wealth,” Better Dwelling said in its analysis of the StatsCan figures.

The steady growth of the world’s developing markets might prove to be another drag on interest rates, maybe even for decades.

“As countries get richer and start to develop, their fertility rates tend to fall,” Edgerton said.

MBN

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