Please see below article received from EPIC Investment Partners this morning, which provides a global market update.
Despite US Treasury yields suggesting higher growth and inflation in the years ahead, demographic trends tell a different story. By 2033, annual deaths in the United States will surpass births, leaving net migration as the sole driver of population growth, according to the Congressional Budget Office (CBO). Without sufficient immigration, the population would shrink, undermining economic growth, worsening fiscal pressures, and intensifying the challenges of supporting an ageing society.
Recent OECD data starkly illustrates the issue: the working-age population’s growth rate has fallen to just 0.15%, sharply down from its peak of 2.24% in July 2000. Declining birth rates and an ageing population are primary drivers, but restrictive immigration policies have further compounded the slowdown.
From 2017 to 2021, annual net migration averaged only 750,000, a significant reduction driven by stricter border enforcement, reduced refugee admissions, and tightened visa restrictions. The CBO projects net migration to average 1.4 million annually in the coming decades, but this estimate appears overly optimistic given persistent political resistance and growing global competition for skilled migrants.
The stakes are immense. Without sufficient immigration, the US faces a shrinking workforce and fewer taxpayers to support an expanding number of retirees. Social security and healthcare systems, already strained, will face widening funding gaps, increasing the fiscal burden on younger generations. Slower economic growth would further constrain the government’s ability to meet its obligations, driving the debt-to-GDP ratio even higher.
Demographic shifts also reshape inflation and interest rate dynamics. A shrinking population reduces demand, creating deflationary pressures akin to those seen in Japan, where decades of demographic stagnation have coincided with weak growth and persistently low inflation. In the US, these deflationary trends could partially offset upward pressures on interest rates caused by sustained fiscal deficits.
Immigration is the clearest solution. Migrants not only fill labour shortages but also sustain demand and drive innovation. Between 2000 and 2018, immigrants accounted for nearly half of the growth in the working-age population. However, countries like Canada and Australia are actively competing for talent, adopting aggressive immigration policies that threaten to outpace the US. To remain competitive, the US must streamline visa processes, expand pathways for high-skilled workers, and implement integration programmes.
The bond market’s pricing, reflecting expectations of sustained growth and inflation, conflicts with long-term demographic realities. Projections for net migration must be realised to avoid population decline. If migration fails to meet these expectations, the US risks slower growth, intensifying fiscal pressures, and reduced global competitiveness.
Given these demographic and fiscal constraints, long-term bond yields appear too high. A return to zero-bound interest rates is plausible as debt servicing and demographic stagnation exert downward pressure. Persistent budget deficits make the current debt trajectory unsustainable, underscoring the urgent need for deficit reduction and immigration reform. Without these changes, a disruptive market correction may ultimately enforce this reality.
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Chloe
17/01/2025