The above chart shows the fast dropping working age population of Europe. Paul Krugman of The New York Times recently suggested that these demographics – hugely different from the what the world has seen in the last few hundred years – mean we cannot expect our financial system to continue to behave in the same way it has before.
Interest rates have been very low in New Zealand, where I live, for some time. This was bad news when my husband and I were saving for our house deposit, but very good news when we bought a house. There have been suggestions here that interest rates will soon rise sharply as the New Zealand economy recovers and they have a little bit already. I am no financial analyst, but Krugman suggests that in fact lower interest rates might simply be a new normal because of a slower economy in the low term due to less workers.
Financial advisors are saying similar things. Closer to home, Australian financial advisor Jason Kim of investment management company Tyndall AM, suggests that Australia is set to follow the same path as the Japanese demographically and this will affect markets.
Mr Kim cautioned that the share of Australians aged 65 and over is set to increase from its current proportion of 15 per cent of the population to 27 per cent by 2050, according to population projections. He advised that this demographic shift suggests that interest rates will fall between 4 per cent and 6 per cent.
Adding a little clarity as to why for those of us who don’t understand financial markets, he said the key issue affecting interest rates is the number of Australians in the 20-34 years cohort which borrows money for homes and cars, and those in the 40-49 cohort which effectively loans out the money.
“In the ‘70s and ‘80s, when the baby boomers came of age and started buying their own homes and buying their cars, interest rates were quite elevated for some time.
Now those baby boomers are ageing and moving into the older cohorts, having largely paid off their mortgage and saving for retirement.
But there haven’t been enough kids born prior to that to move into that 20-34 cohort, and what it suggests here is that interest rates will stay lower for longer because of this demographic shift.”
So more people wanting to lend money for investment and return, and fewer people wanting to borrow it… Good news for my husband and I who are paying off our mortgage? Or bad news for the world economy as a whole that has to support the elderly population with limited workers (and therefore bad news for my husband and I paying off our newly attained mortgage?!).