Why does this matter? Because there is symmetry between working-age population growth and potential economic growth. In other words, monetary and fiscal policy in places like Germany and Japan is going to have to work hard to offset the negative secular population trends in those countries. (It should be noted that Germany, unlike Japan, has benefited greatly from a surge in younger immigrants.) But in the U.S. and other countries where the working-age population is growing, there should be more policy flexibility and better prospects for solid economic growth.
It’s also important to remember that in regions that are fighting major structural headwinds there will be a greater degree of policy risk, and those risks can create market distortions. Short-term distortion influences present opportunities, but long-term distortion makes investing more problematic.
The impact of these various demographic trends is likely to be that inflation will be secularly lower than it has been in the past, and attempts by central banks to raise inflation may ultimately be challenged. In fact, central bank mandates that are focused solely on driving inflation higher to “target levels,” or those that remain too “patient” due to muted inflation on the road to policy normalization, run the risk of creating market distortions.
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, Co-head of Americas Fixed Income, and is a regular contributor to The Blog.