McKinsey Shades Africa in Rise and Rise of Global Balance Sheet Report
The world has never been wealthier, with large variations across countries and households since 2000, the global balance sheet and net worth have tripled in size, according to the Mckinsey Global Institute report centred on 10 countries that accounts for 60% of global income.
The countries included are Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the United Kingdom, and the United States. Of the seven continents, the American continent was fully represented just as Asia, Europe, and Oceania.
Despite her investment allure over the years and deeper oil and gas resources, Africa with 54 sovereign countries was not mentioned at all in a 196 pages report on the global balance sheet.
In the report, Mckinsey discovered that China has topped the United States as the wealthiest nation in the world, noted that global net worth has increased from $160 trillion in 2000 to $510 trillion in 2020.
It highlighted that net worth averaged $66,000 per capita globally in 2020, albeit with large variations across economies, and even larger differences between households within an economy.
In the countries in our sample, per capita net worth ranged from $46,000 in Mexico to $351,000 in Australia, the report stated.
It added that this raises questions about how to build wealth for more households and what drives country differences in the market value of net worth.
“To normalize net worth for differences in income levels across countries—and also because net worth is a claim on future output—we also look at net worth as a multiple of GDP. It ranged from 4.3 times in the United States to 8.2 times in China”.
According to McKinsey, a variety of factors shape the level of net worth relative to gross domestic product (GDP) across countries.
They include resource endowments, trade balances, investment rates, as well as price levels of assets in comparison with consumer baskets. Australia, Canada, and Mexico have considerable natural resources of 0.3 to 0.5 times GDP, it hinted.
McKinsey said manufacturing exporters Germany and Japan, as well as resource exporter Canada, hold significant net financial assets and have a net lending position to the rest of the world, as a result of current account surpluses.
It highlighted in the report that China and Japan have some of the highest net-worth-to-GDP ratios and historically heavy investment in stocks of public and corporate non-real estate assets that are nearly twice as high as in other economies in our sample, except for Mexico.
Relative price levels, particularly in real estate, also play a role, according to McKinsey report.
It said in Australia, China, and France, the value of residential land and buildings relative to GDP is 18 to 44 percent above our sample average, even as residential living space per capita is broadly in line with its sample average.
It however observed that net worth in the United States was the lowest relative to GDP among the ten countries, reflecting the significant US net foreign debt (among other net liabilities) as well as the country’s comparatively low household and corporate real estate wealth relative to income—even though it has the highest per capita floor space in our sample, in part because its land market is vast and more elastic than in other countries.
However, the report noted that household net worth in the United States is higher than average among our sample countries relative to GDP and more than one third higher than national net worth, as households there have large equity and debt claims against the corporate and public sector which are not backed by real assets or total economy net worth.
Put differently, it said US households have large asset holdings that eventually can be regarded as claims against themselves in their role as taxpayers and consumers.
Across the ten countries, McKinsey said China accounted for 50 percent of the growth in net worth, or wealth, over that period, followed by the United States, at 22 percent.
“Japan, which held 31 percent of wealth across the ten economies in 2000, held just 11 percent of the total in 2020. Within the household sectors of China and the United States, two-thirds of wealth is owned by the top 10 percent of households”.
In the United States, the amount of the country’s wealth held by the top 10 percent of households grew from 67 percent in 2000 to 71 percent in 2019, while the share of the bottom 50 percent of wealth owners dropped from 1.8 percent in 2000 to 1.5 percent in 2019, according to the report.
In China, these shifts were more extreme where the top 10 percent of households owned 48 percent of the nation’s wealth in 2000, and by 2015, those households owned 67 percent. The bottom 50 percent of Chinese households owned 14 percent of the wealth in 2000 and 6 percent in 2015.8, the report explains.
McKinsey explains in the report that while the state of economies is usually measured by GDP or other metrics of economic flows, this research examines the balance sheets of ten countries representing more than 60 percent of global income: Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the United Kingdom, and the United States.
“This view highlights a dual paradox: bricks and mortar make up most of the net worth, even as economies turn digital and intangible, and balance sheets have expanded rapidly over the past two decades, even as economic growth has been tepid”.
It said how countries and companies adjust to this divergence between wealth and GDP, find 21st-century stores of value, and address growing financial imbalances will determine the future course of the global economy and our wealth.
Again, among the top discoveries is that the market value of the global balance sheet tripled in the first two decades of this century.
The report reads that each of its three components—real assets and net worth; financial assets and liabilities held by households, governments, and nonfinancial corporations; and financial assets and liabilities held by financial corporations—grew from about $150 trillion in 2000, or about 4 times GDP, to about $500 trillion, or about 6 times GDP in 2020.
“The world has never been wealthier, with large variations across countries, sectors, and households. Net worth is the store of value that determines wealth and supports the generation of future income.
“At the consolidated global level, it is equivalent to the value of real assets because all financial assets are matched by corresponding liabilities so that they net out.
“Net worth tripled between 2000 and 2020 to $510 trillion, or 6.1 times global GDP, with China accounting for one-third of global growth.
“Households are the final owners of 95 percent of net worth, half in the form of real assets, mostly housing, and the rest in financial assets such as equity, deposits, and pension funds.
“Net worth per capita ranged from $46,000 in Mexico to $351,000 in Australia in our sample. In China and the United States, the top 10 percent of households owned two thirds of wealth”, McKinsey report printed.
Mckinsey report hinted that two-thirds of global net worth is stored in real estate and only about 20 percent in other fixed assets, raising questions about whether societies store their wealth productively.
The value of residential real estate amounted to almost half of global net worth in 2020, while corporate and government buildings and land accounted for an additional 20 percent.
Assets that drive much of economic growth—infrastructure, industrial structures, machinery and equipment, intangibles—as well as inventories and mineral reserves make up the rest.
Except in China and Japan, non-real estate assets made up a lower share of total real assets than in 2000. Despite the rise of digitization, intangibles are just 4 percent of net worth: they typically lose value to competition and commoditization, with notable exceptions.
Mckinsey said the analysis does not address nonmarket stores of value such as human or natural capital, adding that asset values are now nearly 50 percent higher than the long-run average relative to income.
Net worth and GDP historically moved in sync at the global level, with country-specific deviations followed by corrections, as in Japan in 1990, the report noted.
However, in the countries in McKinsey sample, net worth in 2020 was nearly 50 percent higher relative to income than the long-run average between 1970 and 1999.
It was also noted that asset price increases above inflation propelled by low interest rates drove this divergence while saving and investment accounted for only 28 percent of net worth growth.
McKinsey report noted that in 2000–20, annual post-inflation valuation gains quadrupled compared with earlier decades and almost caught up with the returns from the operation of assets, which declined.
For every $1 in net new investment, the global economy created almost $2 in new debt, it added while noting that financial assets and liabilities held outside the financial sector grew much faster than GDP, and at an average of 3.7 times cumulative net investment between 2000 and 2020.
“As asset prices rose, economy wide loan-to-value (LTV) ratios, which compare debt to produced assets, remained constant at about 80 percent on average, but exceeded 100 percent in Canada, Japan, and the United Kingdom”.
While the cost of debt declined sharply relative to GDP, thanks to lower interest rates, high LTV ratios raise questions about financial exposure and how the financial sector allocates capital to investment, the report stated.
Explaining how the future may unfold, and what economic actors do, Mckinsey sees three potential scenarios including a new paradigm in which the value of assets relative to income is higher, in part because of demographic changes and a higher propensity to save among high-income households.
This includes a mean reversion in asset prices, and a rebalancing of the balance sheet relative to income from faster GDP growth as investment and productivity growth accelerates along with inflation.
The report reads that households, corporates, financial institutions, and policymakers could assess and stress test the impact of those scenarios on their own balance sheets, find markers for how the economy will evolve, and hedge downsides while benefiting from upsides.
“Growing out of any potential imbalance would require all economic actors to redirect capital into productive and growth-enhancing investments such as sustainability, affordable housing, digital infrastructure, and yet-to-be-discovered 21st-century stores of value for savers”, McKinsey stated.
Australia: Net Worth Per Capita of $351K
Australia’s net worth per capita of $351,000 is the highest of the ten nations in this report, and its net-worth-to-GDP ratio of 6.8 exceeds the global average of 6.1.
The value of land grew by 1.5 times GDP since 2000, while the value of buildings grew by just 0.1 times GDP. Australia has more modest loan-to-value ratios than other economies. It has comparatively high operating returns.
Canada: Net Worth Per Capita of $255K
Canada’s net worth relative to GDP grew significantly after the financial crisis, increasing from 3.9 times GDP in 2008 to 5.9 times GDP in 2020. Home prices more than tripled over the past 20 years, and net investment was comparatively strong.
Financial assets outside of the financial sector grew from 4 times GDP in 2000 to 6.7 times GDP in 2020. Canada has a large financial sector, and its loan-to-value ratio is second only to the United Kingdom’s. Operating returns on average declined from 6.5 percent before 2008 to 4.2 percent afterwards.
China: Net Worth Per Capita of $86K
China’s balance sheet, net worth, and GDP have all grown strongly since 2000. Its net worth relative to GDP is now the highest among the ten countries, at 8.2 times GDP.
Two-thirds of growth in net worth relative to GDP was related to corporate real assets other than real estate, distinguishing China from other focus countries.
China had the largest valuation gains exceeding inflation, consistently higher than its operating returns, which have been below the global average.
France: Net Worth Per Capita of $296K
Home prices more than doubled over the past 20 years, giving France the fastest growth in net worth relative to GDP, 3.5 times, among the ten countries.
In 2020, France had the largest total balance sheet and the second-highest net worth relative to GDP. Large corporate cross-holdings characterize its nonfinancial corporate sector’s balance sheet. The ratio of total financial liability to GDP grew by 7.3 and loan-to-value ratios increased from 0.7 to 1.0 in 2020, surpassing the global average. Operating returns were below 3 percent before 2008 and declined thereafter.
Germany: Net Worth Per Capita of $274K
Germany’s balance sheet and net worth grew closely together with GDP from 2000 to 2016 but have diverged since. Total growth in net financial assets of 0.7 times GDP was larger than growth in household real estate stocks relative to GDP of 0.6.
In contrast to other countries, German home prices didn’t begin to increase until 2010. The financial balance sheet grew from 7.7 to 9.6 times GDP, driven mostly by equity and currency and deposits.
Debt liabilities grew mostly in line with GDP, and loan-to-value ratios remain below the global average. Operating returns have been stable, just below the global average.
Japan: Net Worth Per Capita of $284K
While Japan’s balance sheet expanded less than that of other countries over the past 20 years, it started growing rapidly in 2012 and is now the second-highest in total assets relative to GDP among the ten countries.
Net worth peaked at 8.3 times GDP in 1990, a level not yet reached by any other country, and began to tick up again starting in 2005 after declining for 15 years. The country’s net worth is still the third-highest relative to GDP among the focus countries, after China and France.
Mexico: Net Worth Per Capita of $46K
Mexico’s net-worth-to-GDP multiple grew from 3.5 in 2003 to 5.5 in 2020. Increases in household real estate prices played a big role, as did the growth of real asset prices in the corporate sector.
The financial balance sheet grew in line with net worth, and debt-to-GDP and loan-to-value ratios were the lowest among the ten countries. Mexico’s combination of above average valuation gains and notably high operational returns gave it total returns on real assets of almost three times the global average since 2004.
Sweden: Net Worth Per Capita of $323K
Sweden experienced the second-fastest expansion of net worth and total balance sheet relative to GDP after France. Real estate prices more than tripled from 2000 to 2020. Liabilities have grown in proportion to total assets, driven primarily by equity, including substantial corporate cross-holdings.
Loan-to-value ratios have been in line with global levels. Real valuation gains were higher than global averages and exceeded operating returns, which declined over the past 20 years.
United Kingdom: Net Worth Per Capita of $195K
The 2008 financial crisis heavily influenced the trajectories of net worth and balance sheets in the United Kingdom. Both rose rapidly relative to GDP before 2007 but then stagnated for about five years after the crisis before resuming growth.
Real estate contributed strongly to growth in both periods. A larger-than-average increase in financial assets and liabilities, including a spike in derivatives that began in 2007, reflects the strong UK financial sector. Loan-to-value ratios are the highest among the ten countries.
United States: Net Worth Per Capita of $272K
The United States had the lowest national net worth relative to GDP among the ten countries in this report, although household net worth is much higher due to equity valuations that rose to twice the value of corporate assets underpinning them.
Its national net worth has also grown the least relative to GDP, as valuation changes unfolded more in equity than in real estate and the net international investment position declined by 0.4 times GDP. Operating returns stayed high in contrast to those of most other economies.