The rise and rise of the global balance sheet: How productively are we using our wealth
We have borrowed a page from the corporate world—namely, the balance sheet—to take stock of the underlying health and resilience of the global economy as it begins to rebound from the COVID-19 pandemic. This view from the balance sheet complements more typical approaches based on GDP, capital investment levels, and other measures of economic flows that reflect changes in economic value. Our report, The rise of the global balance sheet: How productively are we using our wealth?, provides an in-depth look at the global economy after two decades of financial turbulence and more than ten years of heavy central bank intervention, punctuated by the pandemic.
Across ten countries that account for about 60 percent of global GDP—Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the United Kingdom, and the United States—the historic link between the growth of net worth and the growth of GDP no longer holds. While economic growth has been tepid over the past two decades in advanced economies, balance sheets and net worth that have long tracked it have tripled in size. This divergence emerged as asset prices rose—but not as a result of 21st-century trends like the growing digitization of the economy.
Rather, in an economy increasingly propelled by intangible assets like software and other intellectual property, a glut of savings has struggled to find investments offering sufficient economic returns and lasting value to investors. These savings have found their way instead into real estate, which in 2020 accounted for two-thirds of net worth. Other fixed assets that can drive economic growth made up only about 20 percent the total. Moreover, asset values are now nearly 50 percent higher than the long-run average relative to income. And for every $1 in net new investment over the past 20 years, overall liabilities have grown by almost $4, of which about $2 is debt.
The state of the global economy
These findings raise important questions for policy makers and business leaders. Foremost among them: is the global economy undergoing a paradigm shift as the world finds new sources of wealth? What might some of those new stores of value be? Or are we at risk of reversion to the historic mean that could result in a decline in net worth? And what will it take to rebalance the global economy?
To construct a global balance sheet, we add up all real assets in the economy as well as all financial assets across all sectors (including, notably, the financial sector), analogous to the way a corporation builds its balance sheet. At a functional level, the global balance sheet has three components that interlock: the real economy balance sheet, the financial balance sheet, and the financial sector balance sheet. Each amounts to about $500 trillion, or the equivalent of about six times GDP (Exhibit 1).
The real economy balance sheet has $520 trillion in real assets, such as machinery and equipment, infrastructure, buildings, natural resources, and intellectual property, or IP. These are mirrored on the liability side as net worth.
Net worth is what is left after all financial assets and liabilities net out.
The financial balance sheet of households, corporations, and governments has $510 trillion in financial assets like stocks, bonds, pension funds, and cash and deposits that facilitate ownership and risk transfer of real assets as well as enabling savings and consumption over time. These financial assets are mirrored on the liability side of the balance sheet since they represent eventual claims against those same sectors.
Finally, financial institutions create and intermediate those financial assets and liabilities—in the process transforming their risks, maturity, and size—and hold $510 trillion in financial assets and a similar level of liabilities. While each of these three balance sheets equalizes within itself at a closed economy level, in our analysis of ten countries, there is a small negative net financial position, meaning that these countries borrow collectively from the rest of the world, and so assets and liabilities do not match precisely.
At the global level, real assets constitute net worth, while aggregate financial assets and liabilities net to zero
Jonathan Woetzel on the global balance sheet
A key concept for this research is that of net worth as a mirror image of real assets at the global level. Net worth is the store of value that defines wealth and helps support the generation of future income. In this report, we assess assets and liabilities, gross and net, from the bottom up, across sectors and countries, and, finally, from a global perspective. For households, net worth includes both real assets such as property and financial assets like stocks and bonds.
At the global or closed economy level, however, all financial assets are matched by corresponding liabilities. The equities that account for roughly half of the household sector’s wealth are liabilities for the issuing corporations. Similarly, a mortgage is a liability for a household but an asset for a financial institution. While the gross volume of financial assets is enormous, after subtracting corresponding financial liabilities, the net aggregate value is zero.
Net worth is what is left after all financial assets and liabilities net out and so is equivalent to the value of real, nonfinancial assets. In this way, financial assets represent wealth to sectors, institutions, households, and countries but, on the consolidated global balance sheet, do not add to net worth, nor do financial liabilities subtract from it.
The world has never been wealthier—with large variations across countries and households
The global balance sheet and net worth more than tripled between 2000 and 2020. Assets grew from $440 trillion, or about 13.2 times GDP, in 2000 to $1,540 trillion in 2020, while net worth grew from $160 trillion to $510 trillion. Average per capita net worth was $66,000, but large variations exist across economies, and even more so across households within an economy. In the countries in our sample, per capita net worth ranged from $46,000 in Mexico to $351,000 in Australia. Net worth ranged from 4.3 times GDP in the United States to 8.2 times GDP in China (Exhibit 2).
Several factors shape the level of net worth relative to GDP across countries. They include resource endowments, trade balances, and investment rates as well as price levels of assets in comparison with consumer baskets. For example, Australia, Canada, and Mexico have considerable natural resources, while manufacturing exporters Germany and Japan hold significant net financial assets. China and Japan have some of the highest ratios of net worth to GDP.
Net worth averaged $66,000 per capita in the ten countries in our sample, with wide variations between countries and households.
Among the ten countries, China accounted for 50 percent of the growth in net worth, or wealth, from 2000 to 2020, followed by the United States, at 22 percent. Japan, which held 31 percent of the ten economies’ wealth in 2000, held just 11 percent in 2020.
Within the household sectors of China and the United States, the top 10 percent of households own two-thirds of wealth. 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 bottom 50 percent of wealth owners’ share dropped from 1.8 percent in 2000 to 1.5 percent in 2019. In China, 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 wealth in 2000 and 6 percent in 2015.
Asset, liability, and net worth profiles vary across economic sectors, with households owning about 95 percent of wealth
Households are the final owners of wealth. For households, real assets, mostly housing, make up almost half of net worth. Net financial assets, in roughly equal parts pension assets, deposits, and equity, make up the other half. Distribution of assets among households varies across countries. For instance, households in Australia, France, Germany, and Mexico hold buildings and land, while in the United States, equity and pensions make up most of household wealth. In Japan, deposits account for more than one-third of total household assets. Via those financial assets and real estate holdings, households in the ten countries control 95 percent of net worth, ranging from 64 percent of national net worth in Mexico to 135 percent in the United States.
The public sector, often seen as an enabler of wealth, owns mostly public buildings, infrastructure, land, and natural resources equal to about 90 percent of GDP, and in some countries also holds financial assets such as stakes in state-owned enterprises. On the liability side of the balance sheet, public debt in many countries exceeds the value of public real assets.
Households own about 95 percent of net worth.
Nonfinancial corporations, the creators of wealth, own productive assets like machinery, factories, and intangibles to the tune of 0.8 times GDP and inventories amounting to about 0.4 times GDP. They also have significant real estate holdings, such as hotels, restaurants, and office buildings. They effectively pass this wealth on to households via debt and equity. Real assets in the corporate sector range from only 1.3 times GDP in the United States to 3.8 times GDP in China.
Financial corporations, the intermediators of wealth, mirror the assets and liabilities in other sectors. They hold financial assets such as mortgages, public and corporate bonds, and equities. At the same time, they owe deposits, bonds, and pension assets, mostly to households. The financial sector includes central banks and their expanding balance sheets.
The value of residential real estate including land amounted to 46 percent of global net worth in 2020, with corporate and government buildings and the land associated with them accounting for an additional 23 percent. Other fixed assets like infrastructure, industrial structures, machinery and equipment, intangibles, and mineral reserves—the types of assets that typically drive economic growth—made up only one-fifth of real assets or net worth, ranging from 15 percent in the United Kingdom and France to 39 percent in Japan (Exhibit 3).
Intangible assets refer to intellectual property like R&D and software and play an increasingly important role in today’s economy. The OECD reported in 2015 that intangible assets had expected returns of 24 percent, the highest rate among produced asset categories. Nonetheless, intangibles represent only 4 percent of total net worth and so have not served as a significant store of value, at least not under current accounting standards. The reason is that the value of intangible assets to their mostly corporate owners is assumed to decline rapidly due to obsolescence and competition, although their value to society may have a much longer shelf life.
Among the ten countries, companies and markets in Canada and the United States may seem to value intangibles more favorably than those in other countries. As market-to-book ratios soared, the value of corporate equity in the United States exceeded the value of underlying net assets by one times GDP in 2020, for example. This may reflect a higher value of intangibles, but it could also relate to the market and competitive environment.
Before 2000, net worth growth largely tracked GDP growth at the global level, with occasional country divergences from the pattern, such as in the United States in the late 1970s and early 1980s in the run-up to the savings-and-loan crisis and in Japan during the asset bubble followed by a banking crisis in the early 1990s (Exhibit 4).
Net worth at market value began growing significantly faster than GDP in most of the ten countries around 2000, 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 historic lows. Between 2000 and 2020, net worth compared to GDP was 104 percentage points higher on average than between 1970 and 1999. The largest increase in net worth relative to GDP in 2000 to 2020 was in France, where it rose by 371 percentage points, as real estate prices soared, particularly in the early 2000s.
Higher asset prices accounted for about three-quarters of the growth in net worth between 2000 and 2020, while saving and investment made up only 28 percent
Anu Madgavkar on what’s driving the rapid growth in net worth
Net worth is a claim on future income, and historically its growth has largely reflected investments of the sort that drive productivity and growth, in addition to general inflation. Over the past two decades, however, net investment as a share of GDP has been low and declining, particularly in advanced economies, contributing just 28 percent to net worth expansion. Asset price increases made up 77 percent of net worth growth, and more than half of those price effects were in excess of general inflation. (The 4 percent in excess of 100 percent reflects negative net financial assets at the global level.)
Real asset valuations have increased over the past two decades as interest rates have fallen and operating returns have stagnated or 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 labor 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 the past decade. This created a rationale for investors to prioritize potential asset price increases over real economic investment in and improvement of operating assets (Exhibit 5).
Operating returns on produced assets vary significantly across the ten countries, at 3 to 4 percent in the European Union and Asian countries we analyze, 6 to 8 percent in Australia, Canada, the United Kingdom, and the United States, and 11 percent in Mexico. Asset portfolios and sector mix only partially explain these differences. For Australia and the United Kingdom, high land prices may skew some of the findings; in Canada and the United States, high yields persist even after adjusting for this.
Declining interest rates and, notably, rental yields were central to increasing asset values
Net worth since 2000 has risen as interest rates have fallen. Our analysis found a strong inverse correlation between five-year rolling averages of net worth and nominal interest rates following 2000. In Japan and the United States, this relationship did not hold, probably because both countries worked to repair their balance sheets following financial crises. Japan and China saw the lowest average annual declines in long-term interest rates across our countries.
Home prices approximately tripled between 2000 and 2020 in the ten countries we looked at.
Real estate illustrates the basis of valuation gains and their link to interest or discount rates. As home prices have risen, approximately tripling on average across the ten sample countries from 2000 to 2020, the impact of higher rental income, including imputed rents on property owned outright, was outweighed by sharply decreasing rental yields. Rental yields typically decline with declining interest rates as financing costs decrease. Declining interest rates have thus played a decisive role in rising real estate prices. Inelastic land supply also played a role, otherwise one might expect rents to go down as interest rates fall rather than real estate prices going up. Australia, Canada, France, and the United Kingdom had the highest growth in the value of household real estate relative to GDP.
Of the net worth gains tied to real estate at the global level, some 55 percent derived from higher land prices, while 24 percent was attributable to higher construction costs. The remaining 21 percent was a result of net investment—that is, construction of new homes or improvements to existing ones less wear and tear.
Real estate prices seem elevated from a long-term historic perspective
According to data from Nobel laureate Robert Shiller, inflation-adjusted home prices in the United States over the past 130 years have mostly moved in line with goods price inflation. However, there were two exceptions to this: beginning during and immediately following World War II and beginning in the late 1990s and continuing through 2006. Home prices then fell sharply during and after the 2008 financial crisis but have since rebounded to their pre-crisis levels.
An even longer-term view of home prices focuses on the Herengracht canal in Amsterdam dating back more than three centuries to 1650. There, too, home prices have largely moved in line with inflation over time, and rent prices have largely moved at the same pace as home prices. The Amsterdam data also show a notable increase in real home prices beginning in the 1990s through 2005 (when the data end). Real prices in 2005 were near their late-18th-century peak.
Nearly all net worth growth from 2000 to 2020 occurred in the household sector as a result of growing equity and real estate valuations
Net worth in the household sector grew from 4.2 times GDP in 2000 to 5.8 times GDP in 2020, exceeding net worth growth overall. Half of household net worth growth came from rising equity valuations, particularly in China, Sweden, and the United States, with another 40 percent coming from rising housing valuations. Housing values in Australia, Canada, France, and the United Kingdom grew more than one full GDP multiple. Household net worth also grew as a result of rising deposits that filtered through to them on the back of money creation and stimulus measures, but debt in the household sector remained relatively steady relative to GDP.
From 2000 to 2020, financial assets such as equities, bonds, and derivatives grew from 8.5 to 12 times GDP. As asset prices rose, almost $2 in debt and about $4 in total liabilities including debt was created for every $1 in net new investment.
The country variations were wide, with the amount of debt created for each $1 in net new investment ranging from just over $1 in China to nearly $5 in the United Kingdom.
For each $1 in net new investment, almost $2 in debt and about $4 in total liabilities including debt was created between 2000 and 2020.
Within the financial sector, financial assets grew from 4.4 times GDP in 2000 to 6.0 times GDP in 2020. Currency and deposit liabilities in particular saw substantial growth of 96 percentage points. Central bank balance sheets, which are included in the financial sector and reflect many of these currency liabilities, expanded collectively from 0.1 times GDP in 2000 to 0.5 times in 2020. More than 40 percent of the global increase occurred from 2019 to 2020 during the COVID-19 pandemic.
Jan Mischke on what has been happening to asset values
Outside of the financial sector, financial assets grew from 4.2 times GDP in 2000 to 6.0 times GDP in 2020. Debt-to-GDP ratios outside the financial sector grew by 79 percentage points, with substantial variance across the ten countries. (In the total economy, debt-to-GDP ratios increased by 77 percentage points over this period.)
In contrast to the 1980s and ’90s, this rapid expansion was broadly in line with the rapid growth of asset values and prices, and it vastly exceeded new investment. Financial assets and liabilities held among households, governments, and nonfinancial corporations have grown an average of 3.9 times the cumulative net investment in real assets across all ten economies, and debt at an average of twice cumulative net investment. In other words, $4 in financial liabilities were created for every $1 in net new investment (Exhibit 6).
Debt-to-GDP ratios are the measurement conventionally used to assess debt sustainability, and while that ratio is similar in China, France, and the United Kingdom, loan-to-value ratios vary markedly, from 57 percent in China to 98 percent in France to 138 percent in the United Kingdom. Loan-to-value ratios, which compare levels of debt to the value of produced assets, are particularly high in the government sectors of the ten countries, where debt is often several factors higher than underlying public assets. While debt has risen, its cost has sharply declined relative to GDP thanks to declining interest rates.
There are different ways to interpret the expansion of balance sheets and net worth relative to GDP. It could mark an economic paradigm shift, or it could precede a reversion to the historical mean, softly or abruptly. Aiming at a soft rebalancing via faster GDP growth might well be the safest and most desirable option. To achieve that, redirecting capital to more productive and sustainable uses seems 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.
In the first view, an economic paradigm shift has occurred that makes our societies wealthier than in the past relative to GDP. In this view, 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. These together could lead to sustainably lower interest rates and stable expectations for the future, thereby supporting higher valuations for assets than in the past.
In the opposing view, this long period of divergence may be ending, and high asset prices could eventually revert to their long-term relationship relative to GDP, as they have in the past. Increased investment in the postpandemic 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, for example. This would lead to a material decline in real estate values that have underpinned the growth in global net worth for the past two decades.
Not only is the sustainability of the expanded balance sheet in question; so too is its desirability, given some of the drivers and potential consequences of the expansion. 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?
The smartest way forward, then, may be for decision makers to work to stabilize and reduce the balance sheet relative to GDP by growing nominal GDP. To do so, they would need 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 raise the productivity of the workforce with capital investment that complements rather than displaces their employees. Many corporations today have excess liquidity that they could deploy. Sustainability investments, for instance, could turn from a cost to a growth opportunity if framework conditions such as higher carbon pricing are put in place that require higher investment yet keep a level playing field between competitors. Could changes to the way intangibles are accounted for on corporate balance sheets result in higher investment? And how should business leaders think about providing new stores of value, justifying equity valuations, and building household wealth?
Leaders of financial institutions could seek to develop financing mechanisms aimed at deploying capital to new growth opportunities, while limiting debt creation for asset transactions at ever-rising prices. Also, the global balance sheet is directly reflected on their own balance sheets. Beyond risk assessments, what do the trends of the past 20 years and scenarios ahead mean for their balance sheets and revenue growth? How might they contribute to the evolution of the global balance sheet, and what would that mean for responsible banking?
For policy makers, rebalancing would require removing barriers to investment in gaps in the economy, such as sustainability and affordable housing. Tools already exist to achieve this, such as reforming zoning regulations that make real estate scarce; tax levers that alter the taxation of capital and property gains relative to income; and getting more serious about carbon pricing and regulation.
This research offers a new way of assessing the macroeconomic context in which businesses, governments, households, and financial institutions operate and live. It provides a platform for developing scenarios for the future and finding ways to hedge against risks and capture benefits should balance sheets rebalance and the economic environment change as a result. We expect to address some of these questions in further research, and we invite comments and insights.