By Mike Dolan
LONDON (Reuters) - Even though it's now widely accepted that the global economy is headed for years of at best slow, mediocre growth, the presumption of endlessly low interest rates has its doubters.
As world policymakers headed home from the International Monetary Fund's latest financial summit shrouded in gloom and with few new ideas on how to reinvigorate their economies, financial markets have turned dour too.
Polish central bank head Marek Belka summed up the mood when he told Reuters this week: "It is very hard to be optimistic."
Equity markets, already braced for this month's end to U.S. Federal Reserve money printing, have suddenly taken fright at overwhelming pessimism about Europe, slowing emerging economies, relentless disinflation from oil and commodities, geopolitical angst and a global health scare from Ebola.
Bond markets, who confounded all optimists this year by sinking long-term government interest rates across the western world by between 70 and 100 basis points, proved yet again to have been the best bellwether of the world economic climate.
The fashionable prognosis of a 'new normal' or 'secular stagnation' of western economies seems set in stone. In the absence of any inflation pulse, inflation-adjusted, or real, interest rates are gravitating to zero and below for years.
But not so fast, say some. Zoom out the lens a little.
For Morgan Stanley's economic consultant and former Bank of England policymaker Charles Goodhart and the bank's staff economist Philipp Erfurth, the big picture may indeed be one of 'slo-mo' growth ahead but real interest rates will rise again.
The two economists insist that the mega-long-term driver of falling interest rates - the ageing of the world's workforce - is about to turn along with some of the more cyclical forces of debt payback and central bank bond buying.
"The current negative real rate of interest is not the new normal; it is an extreme artefact of a series of trends, several of which are coming to an end," they told clients.
Arguing that we are right now going through an inflection point in world demographics with profound effects on how saving and investment play out, they reckon that within 10 years real rates will return to a historically normal 2.5-3.0 percent reflecting nominal rates at 4.5-5.0 percent.
"The almost inevitable conclusion is real rates of interest will reverse from their present decline and go back up."
In a month in which long-term interest rates appear to be evaporating everywhere - German government 10-year borrowing rates plumbed record lows of just 0.83 percentage points this week and 30-year U.S. Treasury yields fell below 3 percent -- that's an eye-catching call. To read markets right now, growth, inflation and interest rates may never rise again.
THRIFT AND PRODUCTIVITY
The basis of Goodhart and Erfuth's argument is familiar and simple. The world is ageing rapidly - and not just the old economically developed world.
Population growth is slowing en masse and within that the 'support ratio', which captures the amount of workers relative to retirees, has already peaked and is set to decline in many countries over the coming decades when some will even see a drop in the absolute number of workers in some.
As peak saving tends to occur in the decade or two before retirement and retirees quickly flip from being savers to net consumers, the swell or glut of savings currently seeking to be banked in safe bonds and fixed income will ebb inexorably too.
If central banks -- and this may be the big 'if' of the moment -- are successful in getting inflation back to targets around 2 percent over that time, then it's this weakened bond bid from savers that will bring real rates of interest gradually back to normal even in a era of slow growth.
What's more, there should also be better bargaining power for the falling share of workers, ending the relentless downward pressure on wages after an extraordinary two decades in which hundreds of millions of new workers from emerging nations were absorbed into the global workforce.
And this in turn can boost productivity as companies opt to invest more in capital and technology.
Citing U.S. academic studies and United Nations data, the Morgan Stanley economists show that the support ratio peaked in 2010 in the United States and will fall back below 1990 levels within 15 years. By 2030, these same ratios in Japan, Germany, UK, France and Italy will retreat back below 1970 levels.
Even in the faster growing emerging world, the data shows support ratios in countries such as China, Brazil, Thailand and Chile also look as if they have already peaked in 2010.
Of course questioning the 'new normal' thesis runs counter to the overwhelming trend of the moment.
And others have a different take on the ageing effect.
Blackrock's chief strategist Russ Koesterich reckons the growth hit from demographic trends will dominate for the foreseeable future but also argues ageing could in fact lift demand for and limit the supply of bonds.
"Older individuals tend to borrow less and exhibit a preference for fixed income," he said.
But even if educated guesses based on past behaviour are all any forecaster has to go on, Goodhart and Erfurth say this may be a critical juncture unlike any other.
"That the future will be like the past, at any rate in the economic sphere, is perhaps more questionable now than for decades."
(Editing by Ruth Pitchford)