The Big Pivot: Interest Rates and Emissions as Global Population Growth Hits a Turning Point

It remains a curiosity that during a time of slow growth and exceedingly low interest rates—two persistent conditions which reliably perplex economists—that more attention is not drawn towards population trends, and fertility rates. Sanjeev Sanyal, who was at one time head global strategist at Deutsche Bank but who has since departed to embark on a writing career, was one of the few in the financial community giving credence to the imminent, and inexorable pull of our approaching demographic tipping point. In 2013, Sanyal released an appropriately titled research note, Predictions of a Rogue Demographer (PDF), wherein he declared UN Population Division forecasts for both mid-century (2050) and the end of the century (2100) to be wildly pessimistic. Indeed, since that note was released, the UN in their 2015 Population Revision dialed back some of their higher-end forecasts, and came to terms with the continued descent of global fertility rates.

The tipping point in question, which now approaches—no really, right now—is the product of the long-term decline in fertility rates and their cumulative effect on the annual population increase, between now and mid-century. We just passed a high point in this measure, in 2013, when the world added 84.21 million people. But this natural rate of increase is now due to decline steadily, falling to 74.65 million by 2025, 62.02 million by 2040, and 52.9 million by 2050. | see:  Annual Global Population Change in Millions 1970-2014 | UN Medium Variant Forecast 2015-2050

Annual Global Population Change in Millions 1970-2014 | UN Medium Variant Forecast 2015-2050

Now, the reason to think about yearly markers like 2025, and 2040, is that these targets appear in just about every forecast for deployment of renewable energy, fossil fuel and natural resource consumption, water availability, equity market performance and pension obligations, and global CO2 emissions. And although this is not happening yet, the above chart really should  be much more influential in all discussions of economic growth, and in particular interest rates. Indeed, in a more recent study published in early 2016 by Paul F. Robbins and Sarah H. Smith, Baby bust – Towards political demography, the authors—who clearly understand this tipping point in population growth just ahead of us—make the point that much of our contemporary economic and intellectual history was produced during a time of high growth rates, primarily during the latter part of the 18th C and of course into the following two centuries.

The implications are of course quite profound, and two areas of contention are worth following. The first is economic growth itself, and its associated interest rate regime. Perhaps it would be a better use of time within the financial community to prepare for a long, rarely interrupted phase of slow growth and low interest rates instead of decrying the system’s failure to return to higher rates of growth. Data across the entirety of the OECD suggests strongly, for example, that Europe and the United States are in the process of joining Japan in a secular era of this type. Energy use, fertility rates, GDP, all point in this direction.

Second, is the the very real possibility that future projections of global emissions from fossil fuel combustion are currently more consistent with a growth rate of fossil fuel use that is simply not going to unfold. While it would be foolish to declare a peak of global emissions based simply on the shape of the recent curve, the fact that global emissions have started to flatten out just as wind and solar costs plunge through key, competitive thresholds really does obligate one to consider how much more fossil fuel consumption growth lays ahead of us. Last year—and you can’t make a forecast based on one year, to be sure–coal’s decline was so severe that even after the increase in global oil and natural gas use, exactly half (50.9%) of all the new, marginal demand growth for energy came from sources outside the oil-coal-natural gas complex. | see: Contribution to Total Global Energy Consumption Growth in 2015 by Source

Contribution to Total Global Energy Consumption Growth in 2015 by Source

Normally, you would assign the words anomaly, or curiosity to such a single year’s performance but to do so would be to ignore trends in global energy use, demographics, and growth rates that have been developing for seven years now. China is literally conducting a war against air pollution, cancelling coal projects, building nuclear, and will deploy more solar this year than even existed globally in 2009; coal retirements in the US will roll onward to the end of this decade; but most important of all is that global solar costs and the learning rate of solar have killed, and will continue to kill, new fossil-fuel power generation projects. More broadly, with the exception of Africa and India, most of the world has now entered a long period where the task is not to build vast new infrastructure, but to replace, enhance, and upgrade existing infrastructure. Water, and transport infrastructure in the US is in dire need of remedy, for example.

Accordingly, it’s now clear that emissions have peaked in the OECD. What are the risks that economies from Japan to Europe to North America will enter a new fossil fuel adoption phase, reversing current trends and once again reach for coal and oil in particular? The risk is remote. OECD economies have long since completed their adoption phase of fossil fuels. What now remains is the dependency phase. You don’t even need to be told that OECD oil consumption, for example, has been in long-term stagnation when you see the following chart of OECD emissions. | see: OECD CO2 Emissions from Fossil Fuel Combustion in Million Tonnes 1975-2015

OECD CO2 Emissions from Fossil Fuel Combustion in Million Tonnes 1975-2015

19th and 20th century growth and development was so transformative that it now constitutes our only available inventory of intellectual history, and (understandably) dominates our expectations. When will interest rates return to normal? Why are central banks not letting interest rates rise? And, look at all these awful policy decisions preventing growth? These sentiments are artifacts; signatures of recency bias and the availability heuristic. In an excellent post last year by Neil Irwin at the New York Time’s Upshot blog, Why Very Low Interest Rates May Stick Around, it’s gently pointed out that high interest rates, not low interest rates, are history’s anomaly.

While upside risk to further fossil growth consumption growth remains in India and Africa, it’s important to understand that the OECD, and China, now act as a restraint on the global rate. For those who continue to predict a breakout of interest rates, global growth, and emissions to the upside, it is now necessary to explain such forecasts not as discrete phenomenon, but rather, to address the associated reversals in population growth trends, and new fossil fuel adoption revolutions required to produce such outcomes.

–Gregor Macdonald