Authors: Lukasz Rachel and Thomas Smith.
In this post we show how various secular trends – demographics, inequality and the emerging market savings glut – raised desired savings at the global level and put downward pressure on real rates. We also show how desired investment could have fallen due to the decline in the relative price of capital goods, lower public investment and a rise in the spread between risk-free rates and the return on capital. Together we think these secular trends can account for 300bps of the historic decline in the global real rate. Moreover, we think these secular trends are likely to persist. This suggests the global neutral rate, which acts as an anchor for individual countries’ equilibrium rates in the long-term, will remain low, perhaps around 1%. Continue reading