The past few years where interest rates have been close to zero in the US should end soon and longer-term trends point to a slower rate of global economic growth on average than has been seen in recent years, which probably carries risk of heightened market volatility, according to research from Lombard Odier.

The past few years where interest rates have been close to zero in the US should end soon and longer-term trends point to a slower rate of global economic growth on average than has been seen in recent years, which probably carries risk of heightened market volatility, according to research from Lombard Odier.

In a note, called Lower Potential Growth In Sight, Lombard Odier Darier Hentsch says the relatively sharp GDP growth seen in many nations after the Second World War is likely to revert to the more long-standing average rise of between 1 per cent and 2 per cent seen since 1700.

While some banks have speculated on the impact of deleveraging post-2008 and the impact of greying populations, it has been mostly academics and other writers who have wondered whether the relatively strong growth of recent decades will be replaced by a longer-term, more subdued pace of growth. In 2011, US economist and commentator Tyler Cowen penned a much-discussed essay, The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. The publication claims that the pace of US economic growth has plateaued due to unrepeatable technological advances and one-off factors such as use of unused land, as well as developments in electricity, mass communications and mass education.

As governments and firms cut debt leverage after the 2008 credit crunch, and population growth slows or even reverses, GDP growth will be curbed, the Lombard Odier note said. The phenomenon of aging populations, particularly marked in countries such as Japan, is already well known. The world’s largest economies (US, China, Japan and Europe) are expected to see work-age populations decline in 2015, directly affecting GDP performance.

Productivity – which besides demography is the second main driver of growth – is harder to predict, but productivity performance has decelerated since the early 1980s. Individual countries have their own reasons: In the US, the IT revolution is, the Lombard Odier report said, having less of an impact on productivity. In Japan and UK, productivity improvements are limited by the rising share of part-time workers. In Germany, for example, that country has made limited productivity gains outside its manufacturing sector, where progress has been marked.

From an asset allocation and investment perspective, the report said the conclusions suggest that the gap between actual and potential output in the US is smaller than it may seem, suggesting that the ability of the US Federal Reserve to persist with its ultra-loose monetary policy is limited, and the period of zero rates “should end soon”. There is also a lower downside risk in the long end of US and eurozone bond yield curves. In a lower-returns environment, sudden changes in confidence and mood will lead to markets being more volatile than otherwise, suggesting investors need to be tactically savvier and hedge against market storms, Lombard Odier said.

Finally, tighter central bank policy and a shift in inflation expectations could see equities and bonds both being hit, pushing up asset correlations and making it even more important for investors to spread risks, the note added.