The future global capital shortfall

By Diana Farrell, Tim Shavers, Sacha Ghai, Ezra Greenberg, Piotr Kulczakowicz, Carlos Ocampo, Yoav Zeif

Over the next two decades, demographic trends will create significant downward pressure on household savings and financial wealth accumulation. The demographic transition is occurring throughout the developed world, albeit with different timing and severity across countries. Demographic pressures on wealth accumulation can be counteracted through policy adjustments, but it will not be easy.

Over the next two decades, demographic trends will create significant downward pressure on household savings and financial wealth accumulation. These demographic forces—absent changes in household age structure, savings behavior, or rates of financial asset appreciation—will drive a decline in the global growth of net financial wealth from the historical rate of 4.5 percent to 1.3 percent. By 2024, this slowing growth will cause net financial wealth to fall some 36 percent, or $30 trillion, below what it would have been had the higher historical growth rates persisted.

The demographic transition is occurring throughout the developed world, albeit with different timing and severity across countries. “Prime savers” are households in their peak income and saving years, while elderly households generally save less. Over the past 20 years, Italy and Japan have experienced steep declines in the ratio of households in their prime saving years to elderly households, while at the same time, the baby boomers in the US were in their peak income-earning and saving years. However, soon after 2000, the US as well as Germany joined Italy and Japan with a declining proportion of prime saving households. Amplifying the impact of this aging trend is the reduction in the birth rates and the behavioral differences in savings patterns between generations—younger people tend to save less.

To provide insight into the implications of demographic change on the global capital market, MGI modeled the impact of demographics on household savings and net financial wealth accumulation for five developed countries—the US, Japan, Germany, Italy and the UK—that together account for approximately 70 percent of global financial stock.

At the regional and country level, the magnitude and timing of the decline in wealth accumulation differ sharply, mostly in line with country-specific demographic drivers and lifecycle savings behavior. Japan, for instance, will experience an absolute decline in household net financial wealth. In Europe, the outcomes range from the relatively mild UK case to the more severe case of Italy. Finally, the US will experience a moderate decline in the growth rate of its household net financial wealth.

If developed economies are to navigate smoothly through this demographic transition, they will need to take immediate action to increase saving, reduce borrowing, and further improve the returns that households obtain on their financial assets. MGI analysis suggests that such changes, while difficult, can meaningfully counteract the demographic pressures. Fiscal discipline today can yield healthier balance sheets tomorrow.

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