About the authors: Jonathan Woetzel is the Shanghai-based director of the McKinsey Global Institute. Anu Madgavkar and Jan Mischke are McKinsey Global Institute partners, based in New Jersey and Zurich, respectively.
The world is richer than it has ever been, but the way in which we create wealth has changed. Should we be using our wealth more productively?
That question emerges starkly from research we have just published that takes an alternative approach to understanding the economy. Rather than focus on flow-based metrics of economic performance like gross domestic product, we constructed a balance-sheet view of the global economy—essentially giving it a health checkup after two unusual decades marked by the 2008 financial crisis, years of ultralow interest rates and, in the past 18 months, the Covid-19 pandemic.
The good news is that we are a lot richer than we were two decades ago. Each of the three components of the balance sheet—real assets, the financial assets and liabilities of governments, households, and nonfinancial corporations, and the financial assets and liabilities of financial corporations—has tripled in the past 20 years to about $500 trillion apiece, or approximately six times GDP. The world’s wealth or net worth as measured by the value of real assets has risen some $350 trillion in the past two decades.
Though the growth in wealth usually tracks GDP growth, since the beginning of this century wealth has soared while GDP growth has been tepid. At a global level, wealth is now up by nearly 50% from the pre-2000 average relative to GDP. Asset prices rising faster than general inflation drove much of this increase, while net new investment contributed only 28% to wealth growth. Declining interest rates combined with inelastic land markets in real estate underpinned asset price growth.
Additionally, the composition of wealth does not reflect the assets that drive economic growth and income; our economies are digitizing rapidly and derive ever more of their growth and value from intangible investments like intellectual property and software. Yet intangibles account for just 4% of wealth, as they lose value to their owners quickly due to obsolescence and competition, even if their value to society may have a much longer shelf life. The other types of fixed assets that typically drive economic growth, such as infrastructure and machinery, are only 17% of the total. By far the biggest form of wealth, accounting for two-thirds of our total real assets, is real estate. In the 10 countries we looked at for our research, real-estate valuations have more than tripled on average in the first two decades of this century, with price rises exceeding the rate of inflation in all countries except Japan.
Financial claims and obligations also grew much faster than GDP. Our balance-sheet view highlights that for every $1 in net new investment, we have created nearly $2 in debt. In other words, half of all new debt is backed by asset value increases or not backed by assets at all, rather than financing new capital stocks.
All of which brings us to the question: could the world be better off if we invested more of our wealth, and directed more of our finance, into building new assets that power our economies and help our societies? We all need places to live, but housing stock hasn’t kept pace with demand. We need to generate economic growth investing in assets like infrastructure to broaden and sustain our prosperity, yet infrastructure investment gaps have proved persistent.
There’s no shortage of investment opportunities. Indeed, our economies and our planet have some critically important investment needs. As the earth warms because of climate change and economies look to decarbonize, huge sums will be needed to finance the energy transition—some $9 trillion a year by McKinsey estimates. While real-estate prices rise, affordable housing remains in very short supply: Some 165 million people in 22 advanced economies are overburdened by housing costs, as rising rents have eaten into the scant income growth of the average household. The world continues to have major infrastructure needs, not just emerging economies but advanced ones, too. In all, we have estimated that the world needs to spend about $3.7 trillion annually on infrastructure for the next 15 years in order to keep pace with projected GDP growth.
Coming out of the pandemic, all stakeholders have an opportunity to help rebalance the balance sheet through investment that drives robust and productive growth. In fact, with such investment we could see a full percentage point acceleration in growth over the next decade according to our research. For business leaders, this would mean identifying new growth opportunities and ways to continuously raise the productivity of their workforce with capital investment including in digital and intangibles. Financial institutions could seek to develop financing mechanisms aimed at deploying capital to new growth opportunities while limiting debt creation for asset transactions at ever-rising prices, for example.
Ultimately, building more of the required real assets will take policies that enable it. Sustainability investments, for instance, could turn from a cost to a growth opportunity if framework conditions such as higher carbon pricing were put in place. Policies to reform zoning regulations could mitigate real-estate scarcity. Skill-building, public innovation procurement, and changes in the way intangibles are accounted for on corporate balance sheets may be tools to deploy in the push for higher investment in that area. There is no shortage of money and no shortage of opportunities to spend it more productively. A starting point is transparency around how we are building and allocating our capital on a global-economy level. Only then can we have the much-needed debate about whether we are investing well for the future—and whether the global balance sheet in its current form is fit for purpose in the 21st century.
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