Demographic Trends Suggest that Interest Rates Will Increase
Applying demographic trends to economic forecasts through a careful analysis of the age makeup of the population has resulted in two Bocconi scholars (Carlo Favero, Deutsche Bank Chair in Asset Pricing and Quantitative Finance, and Vincenzo Galasso, Director of the Bachelor in International Politics and Government) seeing as distant the threat of secular stagnation for the Euro area. However, they consider it difficult to implement structural reforms.
The theory of secular stagnation predicts poor growth, combined with negative real interest rates and resulting financial instability. Favero and Galasso's analysis (Demographics and the Secular Stagnation Hypothesis in Europe) demonstrates, however, that in the next 20 years in Europe we should expect a decrease in GDP per capita, but real interest rates will be positive once again.
The coming years will be characterized by an increase in life expectancy and an ageing of the population, with a low number of births, a gradual decrease in the population between 40 and 59 years old and an increase in over 60s. «While the relationship between age and GDP per capita is linearly negative, in the sense that it consistently declines from 20 years on», explained Favero, «the age between 40 and 59 is when the most savings occur, contributing to a containment of interest rates, while the over 60 population, saving less, contributes to increasing them.» GDP per capita, therefore, is destined to decrease with the progressive ageing of the population, while a sharp increase of over 60s will bring real interest rates to a positive area.
«Our results suggest, furthermore, that the implementation of reforms will not be favored by the age structure of the population», concluded Galasso. «because middle-aged and elderly people have more negative opinions regarding reforms, liberalization, flexibility, policies on competition, globalization and free trade compared to those who are younger, who would reap the benefits of the reforms in the near future».
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