The current financial crisis and worldwide recession have abruptly halted
a nearly three-decade-long expansion of global capital markets. After nearly
quadrupling in size relative to GDP since 1980, world financial assets—including
equities, private and public debt, and bank deposits—fell by $16 trillion last
year to $178 trillion in 2008, the largest setback on record.
MGI
research suggests that the forces fueling growth in financial markets have changed. For the
past 30 years, most of the overall increase in financial depth—the ratio
of assets to GDP—was driven by rapid growth of equities and private debt in
mature markets. By 2007, the total value of global financial assets reached a peak
of $194 trillion, equal to 343 percent of GDP. But the upheaval in financial markets
in late 2008 marked a break in this trend.
Although the full ramifications of the financial crisis will take
years to play out, it is already clear that the financial landscape has shifted
in several ways. Most notably, MGI finds that:
Falling equities accounted for virtually all of the
drop in global financial assets. The world's equities lost almost half their
value in 2008, declining by $28 trillion. Markets have regained some ground in
recent months, replacing $4.6 trillion in value between December 2008 and the
end of July 2009. Global residential real estate values fell by $3.4 trillion
in 2008 and nearly $2 trillion more in the first quarter of 2009. Combining
these figures, we see that declines in equity and real estate wiped out $28.8
trillion of global wealth in 2008 and the first half of 2009.
Credit bubbles grew both in the United States and
Europe before the crisis. Contrary to popular perceptions, credit in Europe
grew larger as a percent of GDP than in the United States. Total US credit
outstanding rose from 221 percent of GDP in 2000 to 291 percent in 2008,
reaching $42 trillion. Eurozone indebtedness rose higher, to 304 percent of
GDP by the end of 2008, while UK borrowing climbed even higher, to 320
percent.
Financial globalization has reversed, with
cross-border capital flows falling by more than 80 percent. It is unclear how
quickly capital flows will revive or whether financial markets will become
less globally integrated.
Some global imbalances may be receding. The U.S.
current account deficit—and the surpluses in China, Germany, and Japan that
helped fund it—has narrowed. However, this may be a temporary effect of the
crisis rather than a long-term structural shift.
Mature financial markets may be headed for slower
growth in the years to come. Private debt and equity are likely to grow more
slowly as households and businesses reduce their debt burdens and as corporate
earnings fall back to long-term trends. In contrast, large fiscal deficits
will cause government debt to soar.
For emerging markets, the current crisis is likely to be no more than a
temporary interruption in their financial market development, because the
underlying sources of growth remain strong. For investors and financial
intermediaries alike, emerging markets will become more important as their
share of global capital markets continues to
expand.
Slideshow The full ramifications of the crisis will take years to play out, but it is already clear that the financial landscape has shifted in several ways. View slideshow
Debt and Deleveraging: The global credit bubble and its economic consequences The recent bursting of the great global credit bubble has left a large burden of debt weighing on many households, businesses and governments around the world, as well as on the broader prospects for economic recovery in countries around the world. Read more
An exorbitant privilege? Implications of reserve currencies for competitiveness Observers assume that the United States enjoys an "exorbitant privilege" because the dollar is the global reserve currency. But MGI finds that in 2007/8, the United States gained a net benefit of just $40 billion to $70 billion—0.3 to 0.5 percent of US GDP. In the "crisis year" to June 2009, the benefit fell to between -$5 billion and $25 billion. Given this, could the United States prioritize domestic growth and jobs over its global responsibilities, sparking greater currency volatility that threatens competitiveness? Read the discussion paper Read a series of essays and join the debate on the future of the dollar on What Matters
McKinsey conversation Authors Susan Lund and Charles Roxburgh examine how the crisis rolled through the global financial system—and discuss the implications for the future of the global economy. Listen to the podcast
The new financial power brokers: Crisis update Although their paths are diverging, all will remain powerful forces in the global economy. Read more on the McKinsey Quarterly site
Will U.S. consumer debt reduction cripple the recovery? U.S. consumers are spending less and saving more. Unless incomes grow faster, each percentage point increase in the saving rate would reduce spending by more than $100 billion—a serious drag on any recovery. Read more
Leading through uncertainty As consumers batten down the hatches and the global economy slows, senior executives confront a more profoundly uncertain business environment than most of them have ever faced. Companies that nurture flexibility, awareness, and resiliency are more likely to survive the crisis, and even prosper. Read more
Mapping global capital markets: Fifth annual report The world's financial assets rose to $196 trillion 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. Read more
The new power brokers: Gaining clout in turbulent markets Four financial market power brokers—Asian sovereign investors, petrodollars, hedge funds, and private equity firms—have grown in size and clout during the financial crisis that began in mid-2007. The crisis underscored one of the biggest benefits offered by the power brokers: vast pools of liquidity. Yet risks remain. Read more
Investing the Gulf's oil profits windfall Between 2007 and 2020, the member states of the Gulf Cooperation Council will earn $5 trillion to $9 trillion from exports of crude oil. Depending on oil prices and levels of domestic investment, 30 to 60 percent of this windfall could flow into overseas capital markets. Read more
Mapping global capital markets: Fourth annual report MGI's analysis highlights trends in the global financial markets across countries, regions, and asset classes. It finds assets reached $167 trillion in 2006, while capital flows climbed to a record $8.2 trillion. Read more
The coming oil windfall in the Gulf At an oil price of $70 a barrel, the six nations of the Gulf Cooperation Council would earn a cumulative $6.2 trillion by 2020, or more than triple the amount they earned from 1993 through 2006. Decisions by Gulf leaders on how to use this wealth will have global repercussions for decades. Read more
