A new report by McKinsey Global Institute, released on 15 November, has revealed that net worth has tripled globally since 2000, but the increase mainly reflects valuation gains in ‘real assets’, especially real estate, rather than investment in productive assets that drive our economies.
The McKinsey report reviewed the underlying health and resilience of the global economy as it begins to rebound from the pandemic. This view from the balance sheet complements more typical approaches based on GDP, capital investment levels, and other measures of economic flows that reflect changes in economic value.
The firm states: ‘Our report - The rise of the global balance sheet: How productively are we using our wealth? - provides an in-depth look at the global economy after two decades of financial turbulence and more than 10 years of heavy central bank intervention, punctuated by the pandemic.
‘Across 10 countries that account for about 60% of global GDP - Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the UK, and the US - the historic link between the growth of net worth and the growth of GDP no longer holds. While economic growth has been tepid over the past two decades in advanced economies, balance sheets and net worth that have long tracked it have tripled in size. This divergence emerged as asset prices rose—but not as a result of 21st-century trends like the growing digitization of the economy.
‘Rather, in an economy increasingly propelled by intangible assets like software and other intellectual property, a glut of savings has struggled to find investments offering sufficient economic returns and lasting value to investors. These savings have found their way instead into real estate, which in 2020 accounted for two-thirds of net worth. Other fixed assets that can drive economic growth made up only about 20% the total. Moreover, asset values are now nearly 50% higher than the long-run average relative to income. And for every $1 in net new investment over the past 20 years, overall liabilities have grown by almost $4, of which about $2 is debt.’
