Out of balance: What’s next for growth, wealth, and debt?

McKinsey report

Out of balance: Whats next for growth, wealth, and debt?

At a glance

• Is the world out of financial balance?By many measures, certainly. Global wealth is $600 trillion, but it has outgrown GDP since 2000 as paper gains powered its rise. Every $1 in investment generated $2 in debt. The top 1 percent of people hold at least 20 percent of wealth. Cross-border imbalances are growing.
• We constructed a global balance sheet of the worlds assets and liabilities as a new lens into the economy.It points to four scenarios. Only productivity acceleration, in large part from technology, restores balance while maintaining wealth and growth. Other scenarios are less rosy. Sustained inflation would shrink real wealth and debt relative to GDP but weaken household budgets and business planning. Worse, a balance sheet reset may trigger wealth losses and years of scant growth. Another alternative is to stay out of balance and return to secular stagnation with super-low interest ratesbut also tepid growth and ongoing risks.
• In the United States, up to $160,000 in per capita wealth is at stake by 2033.Productivity acceleration would raise annual GDP growth to 3.3 percent, about one percentage point above recent levels, and boost per capita wealth by $65,000. Wealth would erode by $95,000 in the sustained-inflation or balance-sheet-reset scenarios.
• Europe stands to fall further behind unless productivity accelerates.For example, if Germany stays in secular stagnation, its gap to US GDP per capita could widen by $19,000.
• Chinese household wealth could expand by half or drop slightly.In all our scenarios, both wealth and GDP would grow more slowly than in a generation. The productivity acceleration scenario requires structural changes and a major step-up in consumption.
• Each country has a hefty productivity prescription, and what happens in one may affect the others.Europe would have to invest, China consume, and the United States saveon the order of 3 to 7 percent of GDP. The balance sheet helps measure whether policy changes, business developments, and consumer trends add up to enough. This lens may inform corporate strategy better than point forecasts or daily financial and political noise.

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