According to Richard Dobbs, director of the McKinsey Global Institute, demand for capital in emerging markets should push up global interest rates—the only question is how much and when.
In the Mckinsey Quarterly, he and other McKinsey analysts report that by 2030, the “world’s supply of capital— that is, its willingness to save —“ won’t match the money needed to finance new roads, ports, water and power systems, schools, factories and hospitals in the world’s fastest growing economies. That gap, which is estimated at $2.4 trillion in 2030, could push up interest rates around the world. The imbalance will show up by 2020.
Comparing the coming boom to the industrial revolution and the postwar rebuilding of Europe and Japan, the Quarterly article projects that global investment will reach $24 trillion in 2030, compared to $11 trillion in 2008.
But the capital needed to finance this surge must come from household savings in the developed world. Saving as a share of GDP has increased from 20.5 percent of GDP in 2002 to 24 percent in 2008, but isn’t likely to rise further. In 2008, China beat the United States as the world’s largest saver, when its national saving rate reached over 50 percent of GDP. But if China follows the path of Japan, South Korea and Taiwan, its savings rate will decline as the Chinese opt for more consumption. At the same time, the proportion of the world population over the age of 60 will reach record levels, requiring more support.
In the United States, household saving rose to 6.6 percent of GDP in the second quarter of 2010, from 2.8 percent in the third quarter of 2005. In the United Kingdom, saving rose from 1.4 percent of GDP in 2007 to 4.5 percent in the first half of 2010. “But even if these rates persist for two decades, they would increase the global saving rate by just one percentage point in 2030—not enough to offset the impact of increased consumption in China and of aging,” says Mckinsey authors Dobbs, and Susan Lund, director of research at the Institute and New York McKinsey consultant Andreas Schreiner.
At the same time, interest rates are at 30-year lows. Real long-term rates—such as the real yield on a ten-year bond—could start rising even within the next five years as investors price in the gap. Companies are likely to seek longer-term, more expensive capital, reversing the popularity of short-term debt since 1990. That’s bad news for companies that depend on consumer credit, but eventually good news for bond-holders.
“A climate of costlier credit will test the entire global economy and could dampen future growth,” they write, but provides an opportunity for investors willing to supply capital overseas.