Economics and markets

Resetting to a modestly higher neutral rate

June 23, 2022

How we got here: Key drivers behind the fall in neutral rates
Demographics have been the key driver pushing developed-market neutral rates lower in recent decades
This decomposes the drivers that influenced the decline in neutral rates from 1982 to 2019 and each variable’s contribution. It shows that the largest detractor from the median neutral rate was demographics (–2%), followed by increased risk aversion (–0.94%), the global savings glut (–0.7%), inequality (–0.22%), declining productivity growth (–0.07%), and the relative price of capital (0.07%).
The road ahead: Lower for not much longer
Previous trends abating or reversing will contribute to a rise in neutral rates in developed markets
This decomposes the expected contribution from each variable in our model from 2022 to 2030. The largest contributors in our median neutral rate are the reduced global savings glut (0.28%), lower inequality (0.04%), lower risk aversion (0.37%), demographics (0.24%), higher productivity growth (0.025%), and relative price of capital (–0.02%).
Neutral rates are expected to rise modestly across developed markets this decade
The historical and forecasted neutral rates for Australia, the U.K., Japan, Canada, the euro area, the United States, and Switzerland. We expect neutral rates to rise in all referenced economies over the next eight years, with Australia reaching the highest real neutral rate of approximately 2% in 2030 and Switzerland the lowest at 0%. We expect the bulk of neutral rate increases for most economies will happen over the next five years because of post-COVID-19 structural economic factors. One should keep in mind that these are median point estimates with wide standard errors given the complexity of measuring and forecasting neutral rates.
What it could mean for investors

Contributors

Roxane Spitznagel
Adam Schickling
Vanguard Insights

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