JPMorgan: Ageing population and deficits two drivers of higher interest rates

Key Points:

• Global public debt has reached $100 trillion, leading to reduced fiscal space and elevated deficits that are driving up interest rates, with fiscal dominance overshadowing monetary policy worldwide, according to JPMorgan’s research team.
• The U.S. faces a growing fiscal deficit with higher interest rates and political inertia on fiscal consolidation, resulting in a higher term premium, though it still maintains more fiscal space and remains the safest country amid geopolitical risks.
• Advanced economies are grappling with declining birth rates and aging populations, which will increase demand for pensions, healthcare, and public investments, potentially causing a substantial rise in public debt beyond 2031 without offsetting fiscal measures.
• The U.S. Social Security system faces a funding shortfall expected around 2032, with no political action anticipated until then, necessitating approximately $600 billion in debt issuance and possible spending cuts or tax increases to address the gap.
• Demographic challenges, including reduced savings and longevity, may lower equilibrium returns and contribute to higher interest rates, ending the demographic dividend of the past four decades and posing an underappreciated risk to economic stability.