According to a recent study on the growth of global wealth in the past few decades, the world is facing unprecedented challenges caused by the significant acceleration in the difference between the growth of global wealth and the growth of global domestic product, as the list of the global financial position has greatly inflated, and the world is now facing four possible scenarios, three Ones are not encouraging and the last one is a bit better.
The global financial position list is an inventory of all global assets and liabilities, and it is undoubtedly discretionary because it is difficult to count all the elements of wealth in the world, which include prices of real estate, financial assets, real assets, and debts of individuals, companies, and governments. But the interesting thing about this study is that there is a big discrepancy between wealth growth versus economic growth, which is supposed to be wealth growth in line with the rate of economic growth.
The growth in global net wealth was in line with the growth in global gross domestic product, and this is a healthy and normal situation. However, since 2000, a strange phenomenon has formed in the growth rate of asset prices and debt volumes exceeding economic growth, and at the same time there has been a decline in productivity growth from levels 1.8 to 0.8 percent annually over the same period. During the period from 2000 to 2021, there was a rise in global asset prices by $160 trillion, with a growth that exceeded economic growth by 30 percent, especially since the Corona crisis alone is responsible for a large part of the discrepancy between wealth and economic growth due to the massive injection of liquidity into a large number of countries.
The McKinsey study provides an analysis of the economic conditions on the assumption that any of four possibilities or scenarios will occur by 2030. The first is that things return to what they were in the past two decades, and economic growth becomes below average, which we witnessed in the years from 2008 to 2016, and thus the significant growth of wealth continues. On paper with moderate levels of inflation, but this will lead to negative growth in the real economy, that is, after removing the effects of inflation.
In this scenario, the cumulative annual performance of stocks will be 6 per cent, which is lower than the historical performance that ranges between 8 and 9 per cent, the annual appreciation of real estate will be 3 per cent, and bonds will achieve only 1 per cent annually.
The second possibility is that interest rates and inflation will continue to rise, and we will have a rise in global asset prices and wealth, but as nominal values, or on paper, but real growth will be zero, with inflation continuing at a rate higher than the target by about 2 percent. The third possibility is that there will be a rebalancing of the balance sheet, as happened in Japan since the 1990s, where there will be a major correction in the prices of various assets, with weak economic growth less than the average by about 1 percent, and a decline in the annual inflation rate to below target percentage.
The fourth scenario is the best scenario, but it requires raising productivity from what it is currently. This is achieved if modern technology is taken advantage of in ways and methods that raise production capacity and reduce costs, in addition to adopting successful methods in finding effective and productive investments. In this scenario, the growth in global wealth will be real, and not only as a result of asset inflation, as a result of higher annual economic growth than the average, and a rise in the real economy by more than 1 percent, but this is accompanied by a rise in the inflation rate to 1 percent higher. The target rate is 2 percent annually.
What is noticeable in these four scenarios is that the cumulative growth of stocks will not be better than it was in the past years, and it will reach 4 percent annually if we have the fourth scenario, through which a significant increase in productivity occurs. Not even real estate will return to previous growth – according to this study – because real estate growth in the best cases reaches 3 percent if conditions return to what they were in the past two decades, and real estate growth will decrease to 1 percent if the best scenarios are presented!
The only exception in the study is that the yield on bonds will be high in the event of a high productivity scenario, becoming 5 percent on average, instead of about 1 percent for the previous period, and the reason for this is that bond yields were weak in the past two decades due to low interest rates, As the bonds achieved large negative returns in some years, the most recent of which was 2022, with a negative return of 18 percent for US Treasury bonds, and negative 14.5 percent for corporate bonds.
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