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Slow population growth means low interest rates are likely here to stay, says JP Morgan

Reported by CNBC: 

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, told CNBC.

“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

A woman holds a baby at a local park on May 12, 2021 in Beijing, China.

Kevin Frayer | Getty Images News | Getty Images

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.

Knock-on effects for savings and investments

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.

If you’re living in a world with lower population growth, you should expect to earn lower returns.

Jesse Edgerton

senior economist, J.P. Morgan

“I do think we should expect higher PE ratios to be the new normal in this world of lower population growth,” he noted.

And while a declining population growth is not necessarily a bad thing overall, said Edgerton, it does mean saving for retirement could become even more elusive moving forward.

“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 be needing to set aside more,” he said.

Source:CNBC

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