Five Reasons Why Capital Won’t Come Cheap Anymore

 

For three decades leading up to the financial crises, capital was cheaper and more available than ever. People became used to low interest rates and ease of borrowing. Now that the tables have turned, how will global investments and savings shift?

As developing economies embark on one of the biggest building booms in history and China boosts its domestic consumption, global savings growth is constrained. To support the changes in the market, global investments must exceed savings to push real interest rates up.

 

For three decades leading up to the financial crises, capital was cheaper and more available than ever. People became used to low interest rates and ease of borrowing. Now that the tables have turned, how will global investments and savings shift?

As developing economies embark on one of the biggest building booms in history and China boosts its domestic consumption, global savings growth is constrained. To support the changes in the market, global investments must exceed savings to push real interest rates up.

And so, the five reasons why the cost of capital can only go up are:

1.       Decline in investment rate of mature economies.

2.       New wave of capital investment driven by emerging markets.

3.       Global investment demand projected to peak astronomically in 2020.

4.       Pressure on real interest rates (unless global savings increase) from coming investment boom.

5.       Gap between demand for capital to invest and supply of savings to widen, increasing interest rates.

Businesses, consumers, investors and governments will experience more costly, less plentiful capital – more than half existing in the emerging markets. As a result, business models will have to change to suit the changing climate, investors develop new strategies and governments playing an active role in helping the economy adjust to the new conditions.

Liz Zuliani

EconomyWatch.com

Read the full report from McKinsey & Company.