Dear MGI Community:

MGI research highlights

As 2008 comes to a close, we confront a more profoundly uncertain financial and economic environment than most of us have ever faced. Uncertainty surrounds not only the downturn's depth and duration but also the very future of a global economic order—until recently characterized by free-flowing capital and trade and by ever-deepening economic ties. To help shed light on the unfolding financial crisis, we recently published a perspective in The McKinsey Quarterly exploring what we know and don't know, what plausible economic scenarios we might face, what the credit crunch means for the real economy, and how companies can navigate through uncertainty.

Beyond the current crisis, our research over the past year continued to explore other trends that are reshaping the global economy and business over the longer term.

Using carbon and energy resources more productively
With the global financial system in crisis and the economy in a downturn, there is a risk of ebbing momentum for investing in clean energy and tackling climate change. Some argue that action is too expensive when the economy is weak; others say it will hurt economic growth and force consumers to make unwanted changes in their lifestyle. Our joint research with McKinsey's Climate Change Special Initiative found that we can dramatically reduce greenhouse gases and grow the global economy for less than we think. Meanwhile, our work on global energy demand trends examined the highly attractive economics of investing in energy productivity--the level of output we achieve from the energy we consume. Other research examines how Europe can further capture its energy productivity opportunity and explored energy demand trends in developing countries. We also identified areas for action to overcome today's barriers and highlighted how companies can not only make large energy-cost savings but also create lucrative new markets in energy-efficient technologies and services. Look for an updated perspective on energy supply and demand trends and oil prices early next year.

China's urban billion
Last year our team in China launched a major initiative to explore the pace and scale of urbanization in China at a unique level of detail. This included an examination of the several paths open to China's national government and city governments, which can, to a great extent, influence how urbanization plays out. By pursuing a more concentrated urbanization path guided by action to boost urban productivity, local and national policy leaders would maximize the benefits to China's economy and environment. Early next year, we will publish detailed city case studies and an analysis of future scenarios for China's urbanization, as well as the findings of a similar urbanization project under way in India.

America's aging boomers
Building on our work with McKinsey's Consumer Insights Practice to develop a predictive view of the economic and psychographic situation of U.S. baby boomers in 2015, we published a report examining the economic impact of the boomers' retirement. Despite their aggregate wealth, we found that a vast majority of U.S. baby boomers are financially unprepared for retirement. Enabling them to work longer would significantly benefit both individuals and the broader economy, but policy makers and business leaders will need to take action. We are currently examining the impact of aging and European enlargement on EU consumer markets.

Accounting for the costs of health care in the United States and Japan
In collaboration with our Health Care Practice colleagues, we analyzed the financing challenges of the Japanese health care system. We also updated our January 2007 analysis of U.S. health care costs. Next year, we will publish an analysis of U.S. state-level health care reform, as well as a perspective on how health care affects income inequality.

Mapping the global capital market and new financial power brokers
Our latest mapping of the world's financial assets, cross-border capital flows, and foreign investments provides a comprehensive look at capital markets in the early stages of the financial crisis. We found that global capital markets grew strongly in 2007, slightly below the pace of 2006 but still faster than the historical trend—likely marking the recent peak for equity and private debt markets. Earlier in 2008, we revisited the "new power brokers"—petrodollar investors, Asian central banks, hedge funds, and private equity—to examine their evolving roles in global capital markets. At the start of the year, we looked at the Gulf Cooperation Council (GCC) nations' coming oil windfall, which will have global repercussions for decades under any price scenario. In the months to come we will continue to follow these topics, analyze the effects of the financial crisis, and monitor longer-term structural shifts in capital markets.

The year ahead
Building on our productivity research in nearly 20 countries across more than 30 industry sectors, we are collaborating with McKinsey's Public Sector Practice on new work examining competitiveness at the sector level. We will also publish a report on productivity and competitiveness in Russia, in collaboration with McKinsey's Moscow office. Other joint research with McKinsey's Social Sector office examines U.S. income and wealth distribution.

We look forward to sharing the findings of all MGI research in the coming year and encourage you to visit our newly revamped Web site at www.mckinsey.com/mgi, where you can access MGI research, interactive graphics, slide shows, videos, and more. You can also sign up for research alerts, podcast audio articles, and an RSS feed.

Happy holidays, and best wishes for the year ahead.

Diana Farrell
Director, McKinsey Global Institute
555 California Street, Suite 4700
San Francisco, California 94104