With interest rates at historic lows or near historic low levels worldwide, that situation is not likely to reverse.
“We believe the RBA will cut interest rates to a historic low of 50 basis points by early next year. Several factors are combining to hold back economic activity, which will keep interest rates very low,” VanEck head of investments Russell Chesler said.
“First, debt levels remain very high, which is suppressing economic activity. Globally, total non-financial debt to GDP, which includes government debt, household debt and company debt (excluding financial debt such as that held by banks), is sitting at its highest level in at least 20 years, at around 220 per cent of global GDP, up from around 160 per cent in 2000. In the US, for example, corporate debt issuance has escalated. With such high levels of debt, households and businesses aren’t consuming or investing as much as they otherwise would do.
“Second, demographic factors are contributing to low levels of economic growth. The increase in the size of the developed market working-age population has slowed considerably in the last 20 years and is expected to contract from around 2030, which will weigh heavily on consumption.
“That will take pressure off bond yields and coincide with a slowing in global population growth. In most developed nations, population growth is either slowing, or in the case of Japan, the population is shrinking. Even in China, population growth is below 1 per cent and it is not much higher in India. Global population growth will only remain positive primarily due to emerging and frontier market population growth.”
Mr Chesler believes structural factors in Australia too will keep interest rates low.
“While population growth is healthier, at around 1.6 per cent, helped on by immigration, household debt is very high, having escalated dramatically since the 1990s. Both household debt-to-income and house prices-to-income ratios are very high. Other than Switzerland, Australia has the highest level of household debt as a percentage of gross domestic product (GDP) in the developed world.
“Another structural factor backing up lower rates is the low level of corporate investment. Non-mining investment as a percentage of GDP remains well below historical averages and combined with the cyclical fall in mining investment, this does not bode well for the economy,” Mr Chesler said.
“Without business investment, economic growth and productivity could stall. While we all know mining investment has fallen sharply since the end of the commodity boom, more broadly across the economy, business investment as a share of GDP has dropped too, taking away an essential ingredient for economic growth.”
VanEck noted that we are also likely to see low interest rates persist in Australia given household consumption will remain subdued. Household income per capita is not increasing and wages growth remains very low, reflecting the high level of underemployment. Australia’s underemployment rate is sitting at almost 8.5 per cent.
“This indicates that a relatively large proportion of the working population is working part-time,” Mr Chesler said.
“Combining all of these factors, we are likely to see interest rates remain at historical low levels for an extended period of time in Australia and offshore, which will force investors looking for income to assess new investment opportunities outside of interest rate products like bonds or term deposits.
“Simply speaking, cash and government bonds will not yield the income that retirees need for retirement and which will force them to move up the risk curve.”