Equities will not yield the same returns in the first half of this century as in the last hundred years, according to Tim Congdon of Lombard Street Research, writing in Economic Affairs, the journal of the Institute of Economic Affairs.

The long run annual real rate of return on equities was 6 or 7 per cent in both Britain and the United States during the twentieth century. The buoyancy of equity returns during that period, says Congdon, can be explained partly by the ‘extraordinary record of economic growth’ : world output increased at about 3 per cent a year as compared with only 1 per cent in the nineteenth century.

But in the twenty-first century there will be a major demographic problem which may curb economic growth. In Europe and Japan, the number of children being born is well below what is necessary to keep the population stable. Women are having, on average, only about one-and-a-half children – a rate which, if continued indefinitely, would cause the population to drop by a quarter in each generation.

Public policy may well change but it is now too late to avoid declines in working-age populations and employment both in Europe and Japan in the 2020s and 2030s. As these two ‘core areas of the world economy’ experience ‘serious demographic strain’ the return on equities seems bound to decline compared with last century.

Read the paper here.