Money Matters

Global wealth

Money Matters
By Kamran Hafeez
Mon, 02, 22

Economic performance is usually measured by GDP growth or other metrics of economic flows. An assessment of the global wealth would accordingly require an overview of the size and corresponding wealth of some of the richest nations of the world. Ten countries today represent more than 60 percent of global income: Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the United Kingdom, and the United States.

Global wealth

Economic performance is usually measured by GDP growth or other metrics of economic flows. An assessment of the global wealth would accordingly require an overview of the size and corresponding wealth of some of the richest nations of the world. Ten countries today 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 factor of global wealth including the net worth of these ten countries is not driven by the industrialisation or performance of their economies alone: bricks and mortar even today make up most of net worth, even as economies turn digital and intangible, and net worth has expanded rapidly over the past two decades, even when economic growth has been tepid.

As per recent research estimates, global real assets and net worth grew from about $150 trillion in 2000, or about four times global GDP, to about $500 trillion, or about 6 times the global GDP in 2020, 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. Disparity in net worth 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 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.

Real estate makes up two-thirds of global real assets or net worth, raising questions about capital and wealth allocation

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 which is infact much lesser than residential real estate. This has been a declining trend.

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 digitisation, intangibles are just four percent of net worth.

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; however, in the richest countries net worth in 2020 was nearly 50 percent higher relative to income than the long-run average between 1970 and 1999. Asset price increased above inflation propelled by low interest rates, while saving and investment accounted for only 28 percent of net worth growth.

This reflects that the historical link between the growth of wealth, or net worth, and the value of economic flows such as GDP no longer holds. Economic growth has been sluggish over the past two decades in advanced economies, but net worth, which long tracked GDP growth, has soared in relation to it. This divergence has emerged as asset prices rose sharply—and are now almost 50 percent higher than the long-run average relative to income.

The increase was not a result of 21st century trends such as the increasing digitisation of the economy. Rather, in an economy increasingly propelled by intangible assets, a glut of savings has struggled to find investments offering sufficient economic returns and lasting value to investors.

These savings have instead found their way into a traditional asset class, real estate, or into corporate share buybacks, driving up asset prices. At the same time, the growth in financial assets and liabilities has mirrored that of real assets, whether in response to or as a reason for real asset price increases.

Wealth as measured by net worth is rising fast. Yet the divergence between net worth and GDP raises some critically important questions for policymakers and business leaders. We could expect to see a paradigm shift as today’s world uncovers new sources of wealth? Why has this rise in net worth not resulted in sustainable increases in economic flows? Is there a possibility of global meltdown in asset pricing, which would potentially entail a sharp decline in net worth and a knock-on effect on financial markets?

Since 2000, the global balance sheet and net worth have tripled in size. Net worth grew

from $160 trillion in 2000 to $510 trillion in 2020. 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. This raises questions about how to build wealth for more households and what drives country differences in the market value of net worth.

Net worth as a multiple of GDP also varied and ranged from 4.3 times in the United States to 8.2 times in China. A variety of factors shape the level of net worth relative to 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 that of GDP. 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.

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 large economies.

China accounted for 50 percent of the growth in net worth, or wealth, over the period since 2000, followed by the United States, at 22 percent. On the other hand 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 there is also significant disparity, 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.

In China, these shifts were more extreme: 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. Wealth has grown out of proportion with income due to asset price inflation, marking a departure from historical trends

Before 2000, net worth growth largely tracked GDP growth at the global level. In about 2000, however, net worth at market value began growing significantly faster than GDP in almost all the rich countries, even as real investment continued moving in tandem with GDP. This coincides with a period during which interest rates and rates of return on real estate declined to historical lows. Real asset valuations have grown over the past two decades as interest rates have fallen and operating returns have stagnated or in fact declined.

Real assets are critical to the global economy. Returns on those assets account for about one-quarter of GDP directly. Growth in real assets also complements labour in driving productivity, which in turn drives economic growth. As asset valuations soared, valuation gains over and above inflation outstripped operating returns in several economies over certain time periods, creating a rationale for investors to prioritise the potential for asset price increases over real economic investment and improvement of operating assets.

Nearly all net worth growth from 2000 to 2020 occurred in the household sector as a result of growing equity and real estate valuations. Household net worth grew from 4.2 times GDP in 2000 to 5.7 times GDP in 2020.

The vast expansion of balance sheets and net worth relative to GDP is not sustainable in the longer term. To avoid any global meltdown a soft rebalancing via faster GDP growth might well be the best option. To achieve that, redirecting capital to more productive and sustainable uses needs to be the economic imperative of our time, not only to support growth and the environment but also to protect our wealth and financial systems.

Global societies are today wealthier than in the past relative to GDP. Several global trends including aging populations, a high propensity to save among those at the upper end of the income spectrum, and the shift to greater investment in intangibles that lose their private value rapidly are potential game changers that affect the savings-investment balance. Such trends if continued would mean even lesser investments in producing assets and thereby continued slowdown in economic growth and lower interest rates, thereby supporting higher valuations than in the past.

As an alternative, increased investment in the post pandemic recovery in the digital economy, or in sustainability might alter the savings-investment dynamic and put pressure on the unusually low interest rates currently in place around the world. This may lead to in part a decline in real estate values, but may help drive the economic engine forward with higher GDP growth rates than what have been witnessed in the past.

This rebalancing is needed as the current global net worth phenomenon is neither sustainable nor desirable. For example, is it healthy for the economy that high house prices rather than investment in productive assets are the engine of growth, and that wealth is mostly built from price increases on existing wealth?

Economists and decision makers need to manage the imbalance by growing nominal GDP. To do so, they would need to create policies to redirect capital to new, productive investment in real assets and innovations that accelerate economic growth.

For business leaders, this would mean identifying new growth opportunities and ways

to continuously raise the productivity of their workforce with capital investment that complements rather than displaces their employees.


The writer is a staff member