In its Interpreting Innovation report, BlackRock said government spending on health care and pensions is set to soar in developed countries in coming decades, resulting in tax hikes or cuts to benefits.
The firm also said the rising cost of university education in many economies could impact growth, particularly the US, as it puts young people in debt, reducing their future spending.
Income inequality, the report said, could also dampen the pace and durability of economic growth, according to a study by the International Monetary Fund.
“A rise in inequality generally leads to rising household leverage, increasing economies’ vulnerability to financial crises,” said BlackRock. “Inequality can also trigger punitive wealth taxes and other populist measures.”
While the report said sensible policies can ease many of these problems, years of easy monetary policy and low interest rates have “dulled policymakers' incentive to press ahead with tough structural reforms”.
“Increasing political polarisation in some countries makes the process even harder,” said BlackRock. “History shows it often takes a crisis to generate the political consensus for change.”
The firm said that while it still believes a cyclical upturn is likely over the next year or two, the overall trend will be subdued, with rising levels of debt.
“This means economic policymakers are likely to be leery of tightening financial conditions too quickly,” said the report.
BlackRock said slower economic growth will not, however, necessarily be bad for equities.
“Low nominal growth and bond yields will mean financing will stay cheap for companies; this is good news for equity holders,” said the report.
“Bond markets are effectively subsidising equities by allowing companies to cut debt service costs and extend maturities.”
BlackRock warned, however, that the disruptive effects of innovation in coming years could cause dispersions to rise within markets, making company selection vital.
The report also said the longer financial conditions remain easy, the greater the potential snap-back.
“The reliance of equity markets on cheap financing [also] means bonds and equities could become more highly correlated,” BlackRock said.
