We already know that demographic forces are leading to slower labour input growth in most advanced economies. Productivity growth is also slowing. This combination points to lower global economic growth in the future. And there’s more. The most important input into the equilibrium real rate of interest – what economists refer to as “the neutral rate” – is the underlying growth in economic potential.
Investors are only beginning to come to grips with the implications of this downward drift in the neutral rate of interest and what it means for long-term investment returns. Obviously, it matters a great deal whether productivity growth is likely to remain low or recover as the world economy gains traction, and that depends on how you explain slowing productivity growth.