So say Charles Goodhart and Manoj Pradhan, painting a sweeping picture of the future economic landscape in a new paper published by the Bank for International Settlements.
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In it, the London School of Economics professor and former Morgan Stanley economist push back against the popular view that an aging population will slow growth and drag down rates. The research contrasts with models cited by the Federal Reserve, which project that inflation-adjusted real rates are intrinsically tied to potential growth.
“The demographic sweet spot is already behind us, and both the equilibrium real interest rate and inflation have probably already stopped falling,” write Goodhart and Pradhan. “Future problems may now intensify as the demographic structure worsens, growth slows, and there is little stomach for major inflation.”
A three-decade rush of new workers from Asia and other emerging markets has juiced returns for bond investors thanks to weak price growth, creating a sweet spot for capital owners that’s now reversing, the authors write.
But demographic trends are poised to be the driving force for the price of labor and capital across large economies and a graying population will in turn drain savings ratios and offset a corresponding reduction in investment spending, which tends to fall when demand is lower.