Savers in emerging markets likely to keep rising and help maintain low global interest rates, experts claim

News - Savings

Written by Ray Clancy

Monday, 30 August 2010 10:27

Global interest rates may remain low for at least 20 more years, according to economists at US investment bank Goldman Sachs.

In a paper, Current Accounts and Demographics: The Road Ahead, they argue that the credit boom of the last decade, which ended with the onset of the so called credit crunch in august 2007, was partly fuelled by excess savings from Asia, resulting from the recycling of the surplus of the gains from globalised trade back to advanced countries.

In the aftermath of the Asian financial crisis of 1997/98, governments sought to build up currency reserves by keeping currencies undervalued and the current account deficits of countries such as the US and UK were partly financed by such a strategy.

They say that long term interest rates influenced by what was termed a ‘saving glut’, were pushed down to then historic lows, which helped to fuel asset booms in badly governed countries of the West, in particular.

Dominic Wilson and Swarnali Ahmed examine how the influence of demographics over the next 20 years and beyond may affect current account positions. Importantly, they say it is the portion of a population of prime saving age, that is those aged 35 to 69, that matters most, and not the size of the working age population, as is commonly discussed in policy debates.

That group is still growing globally, even in the developed world, and will likely rise in most of the emerging markets world, including China, for at least two decades. They say the common intuition that China is demographically more like a developed market than a typical emerging market is only true with respect to working age population. In terms of prime saving dynamics, China is more like an emerging market than a developed market.

The economists say the proportion of prime savers in the developing world, including China, will rise more and peak later than in the developed world, thereby maintaining a saving glut and downward pressure on global rates.