Janet Yellen duly reigned in interest rate rise expectations in her Monday night speech, the market has now gone back to pricing in a negligible chance of a rate rise next week. However, she did reiterate in her comments she believes that gradual rises in the Fed funds rate will be appropriate.
The Federal Reserve are keen to get interest rates back to what they believe are more “normalised levels”, one reason is to more evenly balance the returns for savers and speculators. According to an article in Barron’s based on a report from McKinsey’s, there may be other structural reasons within the global economy, not necessarily associated with the 2008 crash, that means this may not occur. It all boils down to the numbers of people being born, and the age of the population.
Over the past 50 years the global economy has grown at an average of 3.6% per annum, according to McKinsey’s. This translates into the global economy growing 6 fold in the past 50 years. This growth has been driven by a combination of an increasing population and an improvement in productivity. Population growth has been down to improved fertility, improved infant mortality and people living longer. McKinsey’s believe in the coming 50 years, population growth will fall to 0.3% per annum and if productivity gains remain at 1.8%, global growth will fall from 3.6% per annum to 2.1% per annum. According to McKinsey’s the average employee generates over 2.4X what they did in the mid 1960’s.
Going forward the big challenge to global growth is an aging population. Japan, which has had 20 years of low growth, could be suffering from this problem already as the country has the second oldest median average age, Monaco is the only country above it. Interestingly Japan is tied with Germany. The median age of these two countries is 46.2 years. If this report does have some basis of fact to it in the coming years, technology may play a greater role in improving productivity. But as the Barron’s report highlights there may be implications for investment returns going forward, if productivity slows margins will come under greater pressure. We have seen a trend towards share buyback’s, financial engineering and mergers from company boards in the past few years, this trend could continue.
So as much Janet Yellen may wish to normalise interest rates and focus on such things as the oil price. The reality may be, as the Barron’s column suggests going forward there may not be enough new people around to do the buying.