EEconomic output is usually measured in terms of GDP growth or other measures of economic flows. An assessment of global wealth would accordingly require an overview of the size and corresponding wealth of some of the world’s wealthiest nations. Ten countries now represent more than 60 percent of global income: Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the United Kingdom and the United States.
However, the global wealth factor, including the net worth of these ten countries, is not determined solely by industrialization or the performance of their economies: bricks and mortar still accounts for the bulk of net wealth today, even as economies become digital and intangible and Net value has grown rapidly over the past two decades, even when economic growth has been lukewarm.
According to recent research estimates, global real wealth and net worth grew from about US$150 trillion in 2000, or about four times global GDP, to about US$500 trillion, or about six times global GDP, in 2020, with China accounting for a third of that constitutes global growth.
Households are the ultimate owners of 95 percent of net wealth, half in physical assets, mostly housing, and the rest in financial assets such as stocks, deposits and pension funds. The differences in net wealth per capita ranged from $46,000 in Mexico to $351,000 in Australia. In China and the United States, the top 10 percent of households owned two-thirds of wealth.
Two-thirds of the world’s net wealth is stored in real estate and only about 20 percent in other tangible assets, raising questions about whether societies are productively storing their wealth. The value of residential real estate accounted for almost half of global net wealth in 2020, while corporate and government buildings and land accounted for another 20 percent.
Real estate accounts for two-thirds of the world’s real wealth, or net worth, raising questions about capital and asset allocation
Assets that drive much of economic growth — infrastructure, industrial structures, machinery and equipment, intangible assets — as well as inventories and mineral reserves make up the rest, which is actually much less than residential real estate. This was a declining trend.
Except in China and Japan, non-real estate accounted for a smaller proportion of total tangible assets than in 2000. Despite increasing digitization, intangible assets account for only four percent of net wealth.
Assets are now nearly 50 percent higher than the long-term average relative to income. Net worth and GDP have historically moved in sync on a global scale; In the richest countries, however, net wealth relative to income in 2020 was nearly 50 percent higher than the long-term average between 1970 and 1999. Asset prices rose above inflation, fueled by low interest rates, while saving and investing accounted for just 28 percent of that growth of net worth.
This reflects that the historical link between wealth or net worth growth and the value of economic flows such as GDP no longer exists. Economic growth has been sluggish in advanced economies over the past two decades, but net worth, which has long tracked GDP growth, has risen sharply in relation to this. This divergence has emerged as asset prices have risen sharply — and are now nearly 50 percent above the long-term average as a percentage of income.
The increase was not the result of trends in the 21st century such as the increasing digitization of the economy. Rather, in an economy increasingly fueled by intangible assets, a wealth of savings is struggling to find investments that offer investors sufficient economic returns and enduring value.
Those savings have instead found their way into a traditional asset class, real estate, or into corporate share buybacks, pushing up asset prices. At the same time, growth in financial assets and financial liabilities has mirrored growth in real assets, either in response to or as a reason for increases in real asset prices.
Wealth, as measured by net worth, is increasing rapidly. But the divergence between net worth and GDP raises some crucial questions for policymakers and business leaders. Could we expect a paradigm shift as today’s world discovers new sources of wealth? Why hasn’t this increase in net worth resulted in a sustained increase in economic flows? Is there a possibility of a global collapse in asset prices, potentially leading to a sharp drop in net worth and a knock-on effect on financial markets?
Since 2000, the global balance sheet and net worth have tripled. Net worth grew
from US$160 trillion in 2000 to US$510 trillion in 2020. Net wealth per capita globally averaged US$66,000 in 2020, albeit with large variations between economies and even larger differences between households within an economy. This raises the question of how wealth can be built for more households and what drives country disparities in market value of net wealth.
Net worth as a multiple of GDP also varied, ranging from 4.3 times in the United States to 8.2 times in China. A variety of factors shape the level of net wealth relative to GDP in each country. These include resource endowments, trade balances, investment ratios, and asset price levels relative to consumer baskets. Australia, Canada and Mexico have significant natural resources amounting to 0.3 to 0.5 times GDP. Manufacturing exporters Germany and Japan, as well as resource exporter Canada, have sizeable net financial assets and a net credit position with the rest of the world due to current account surpluses.
China and Japan have some of the highest net worth-to-GDP ratios and historically high levels of investment in holdings of public and corporate non-real estate assets, nearly double those of other major economies.
China has accounted for 50 percent of net wealth growth since 2000, followed by the United States at 22 percent. On the other hand, Japan, which owned 31 percent of wealth in the ten economies in 2000, held just 11 percent of total wealth in 2020.
There are also significant differences within the household sectors in China and the United States, with two-thirds of wealth owned by the top 10 percent of households. In the United States, the wealth share held by the top 10 percent of households rose from 67 percent in 2000 to 71 percent in 2019, while the share held by the bottom 50 percent of wealth owners rose from 1.8 percent in 2000 to 1.5 percent declined percent in 2019.
In China, these shifts were even more extreme: the top 10 percent of households owned 48 percent of the country’s wealth in 2000, and by 2015 those households owned 67 percent.
The bottom 50 percent of Chinese households owned 14 percent of wealth in 2000 and 6 percent in 2015. Wealth has grown disproportionately to income due to asset price inflation, a departure from historical trends
Before 2000, net wealth growth broadly tracked GDP growth at the global level. Around the year 2000, however, net worth at market value began to grow significantly faster than GDP in almost all rich countries, although real investment continued to move in line with GDP. This coincides with a time when interest rates and real estate yields have fallen to historic lows. Real asset valuations have risen over the past two decades as interest rates have fallen and operating returns have been flat or even falling.
Real assets are vital to the global economy. The income from these assets directly accounts for about a quarter of GDP. The growth of physical assets also complements labor in increasing productivity, which in turn drives economic growth. As asset valuations soared, valuation gains, beyond inflation, outpaced operating returns in several economies over periods of time, providing a rationale for investors to prioritize the potential for asset price appreciation over real-economy investment and improving working capital.
Almost all of the net wealth growth from 2000 to 2020 was in the household sector, driven by rising equity and property valuations. Household net wealth increased from 4.2 times GDP in 2000 to 5.7 times GDP in 2020.
The huge expansion in balance sheets and net wealth relative to GDP is unsustainable in the longer term. To avoid a global meltdown, a soft rebalancing via faster GDP growth might be the best option. To achieve this, reallocating capital to more productive and sustainable uses must be the economic imperative of our time, not only to support growth and the environment, but also to protect our prosperity and financial systems.
Global societies are now more prosperous relative to GDP than in the past. Several global trends, including aging populations, a high propensity to save among those at the higher end of the income spectrum, and the shift towards larger investments in intangible assets that are rapidly losing their private value, are potential tipping points affecting the balance between savings and wealth impact investments. If such trends continue, they would mean even lower investment in asset production and hence a prolonged slowdown in economic growth and lower interest rates, which would support higher valuations than in the past.
Alternatively, increased investment in post-pandemic digital recovery or sustainability could alter savings-investment dynamics and put pressure on the unusually low interest rates currently prevailing around the world. This may partially lead to a drop in real estate values, but may help fuel the economic engine with higher GDP growth rates than in the past.
This rebalancing is necessary because the current global net worth phenomenon is neither sustainable nor desirable. For example, is it healthy for the economy that high real estate prices, not investments in productive assets, are the engine of growth, and that wealth is built mainly through price increases on existing assets?
Economists and policy makers need to manage the imbalance caused by rising nominal GDP. To do so, they would need to create policies to redirect capital towards new, productive investments in real assets and innovations that accelerate economic growth.
For business leaders, this would mean identifying new growth opportunities and paths
continually increase the productivity of their workforce through capital investments that complement, not displace, their workforce.
The author is an employee