Global Factors Affecting Global Wealth

Terminology and Coverage

In national accounting systems, the national wealth (or net worth of the total economy) is defined as the total value of non-financial assets of a country plus the net financial assets with respect to the rest of the world. If this definition is applied in analogy to the world, then global wealth would be the aggregate total value of the non-financial assets plus all non-debt financial assets of all national economies. The creation of a debt-based financial asset (e.g. by issuing a bond) creates simultaneously an asset for the holder of the security and a liability for the issuer, and the addition to the net wealth is zero if the wealth positions of all holders (positive) and issuers (negative) are aggregated. This is so for a global balance sheet, but it is different for national accounts which only capture the wealth position of residents of a particular country (who may hold securities issued abroad or may have issued securities which are held by non-residents).
If “global wealth” would be understood in analogy to national wealth as defined by national accounting, it would primarily be a phenomenon of the real economy and comprise a very wide range of different items in private or public ownership such as land, buildings, machinery, and natural resources. Such a type of global wealth and the factors affecting it are very different from what is typically analysed in Global Wealth Reports (GWRs) published by global consultancy firms, wealth management companies and private banks2. The national accounting view of global wealth (in analogy to national wealth) comprises all wealth assets of the whole economy irrespective of the legal or economic status of the wealth holder. In contrast, the GWRs are interested in the wealth of only one sector of the economy, namely the household sector.

On this level of (dis)aggregation of the economy, national accounts should provide data for the following wealth items (OECD 2013):

• Non-financial assets: owner-occupied dwellings (principal residence, other owner-occupied dwellings and other real estate), consumer durables (particularly vehicles), valuables5, and intellectual property and other non-financial assets. Only few statistical offices can provide data on all these items. This lack of data enforces de facto a reduction of “non-financial assets” to real estate in international comparisons.
• Financial assets: Currency and deposits, bonds and other debt securities, net equity in own unincorporated businesses, shares and other equity, mutual funds and other investment funds, life insurance funds, pension funds, other financial assets. GWRs usually summarise this detailed list in two or three groups only, for example (1) bank deposits, (2) securities (debt- and equity-types), (3) insurance and pensions.
• Liabilities: owner-occupied residence loans, other investment loans, consumer durable loans, consumer credit loans and other liabilities. This differentiation of household liabilities is not common in GWRs. Instead, all liabilities are treated as one block for the calculation of the net worth.

When GWRs present figures for the “total wealth” of the “world”, these are figures for the net wealth of the household sector. International comparisons of household wealth are plagued by incomplete and unreliable data. Both international organisations such as the OECD and publishers of GWRs try to supplement national account statistics by survey results. The OECD had launched an initiative for the improvement of the quality and consistency of wealth data in 2011. This led to the “OECD Guidelines for Micro Statistics on Household Wealth” (OECD 2013). The Guidelines shall supplement the aggregate wealth data of the System of National Accounts (United Nations et al. 2009) which lack information on the intra-sectoral distribution of the household wealth.
While the OECD (2015a) tries to close data gaps for households also at the bottom of the wealth pyramid, the publishers of GWRs are focussing predominantly on the top, i.e. on high net worth individuals (HNWIs). The geographic coverage of the OECD is primarily restricted to its member states, while the GWRs try to cover the whole world. They have to estimate data on the size of wealth, its structure and the distribution for a large number of countries, and even if GWRs use the same initial database they may end up with different results because of different estimation models. Diverging figures can also result from different reference units (e.g. individuals or households) and sometimes from different definitions of wealth items For example, principal residences or positions vis-à-vis insurance companies and pension schemes are excluded from the list of wealth items in some GWRs. This may not be a serious issue for comparisons within the group of HNWIs as these items are either considered to be rather similar (residences) or irrelevant (insurance and pension claims) for HNWIs. However, these items are the major wealth items for households at the bottom of the pyramid, and their inclusion or omission will impact the relative wealth position of different groups. Finally it should be noted that GRWs differ in the definition of HNWIs or millionaires and billionaires which may confuse non-expert readers.
The interest in the wealth of the bottom and the top of the pyramid has grown recently as it became apparent that over the last couple of years the inequality in the distribution of wealth has increased substantially and rapidly and more pronouncedly than the inequality of income. After WWII the share of the top 1% or 10% of the population in total household wealth showed a decreasing trend in countries such as the United Kingdom9 or the United States10 up to the 1980s. Then it started to increase, and the increase accelerated in the 2010s, i.e. after the recovery from the 2007-2009 financial crisis. One GWR estimates “that the lower half of the global population collectively own less than 1% of global wealth, while the richest 10% of adults own 87% of all wealth, and the top 1% account for almost half of all assets in the world.” (Credit Suisse 2014a, p. 13).

Some Statistics on Global Wealth

Size: The total global household wealth in mid-2014 is estimated at US$263 trillion (at current exchange rates) which is 20% above the pre-crisis peak in 2007. The 2014 average wealth per adult of US$56,016 was only 7% higher than in 200712.
Regional Structure: The wealthiest region is North America with 34.7% of global wealth, closely followed by Europe (32.4%). The following ranks are Asia-Pacific [excluding China and India]13 (18.9%), China (8.1%), Latin America (3.5%), India (1.4%), and Africa (1.1%). The regions with the highest wealth growth 2000-2014 were India, Latin America, Africa, and China. North America, Europe and Asia-Pacific (excluding China and India) are lagging behind.

Ranking: The top 5 countries in terms of average wealth per adult by mid-2014 are Switzerland (US$581,000), Australia (US$431,000), Norway (US$359,000), United States (US$348,000), and Sweden (US$333,000). A ranking by median wealth pushes countries with lower levels of wealth inequality to the top: Australia (US$225,000), Belgium (US$173,000); Italy (US$142,000), France (US$141,000) and United Kingdom (US$131,000); the median wealth of the United States is only US$53,000.
Growth: “The growth in real financial assets, i.e. nominal financial assets less the general rate of inflation, was much lower than the growth in nominal financial assets virtually across the board.” (Allianz 2014, p.10). The countries with the highest growth in average wealth per adult at current exchange rates 2000-2014 were New Zealand, Australia, Indonesia, China, and Malaysia, while the top performers at constant exchange rates were Turkey, Indonesia, Vietnam, Pakistan, and India (with China close behind). Two conclusions can be drawn: “The positions of individual countries in the global wealth league table are sensitive to exchange rates versus the US dollar”15, and developing countries in Asia-Pacific are catching up fast (although the regional average is levelled down by a stagnating wealth in Japan).
Composition of Wealth: Financial assets amount to 54% of the total (gross financial and non-financial) wealth per adult globally, but this share can be as high as 69% in North America or as low as 36% in Latin America (Europe 44%)16. The financial assets are composed globally of 26% bank deposits, 38% securities, and 31% positions vis-à-vis insurance companies and pensions schemes (and 2% others)17. However, national or regional asset structures differ considerably from the world average: The shares of bank deposits range from 13% in North America to 59% in Eastern Europe (32% in Western Europe).; securities from 17% in Japan to 54% in North America (27% in Western Europe), and insurance and pension claims from 14% in Eastern Europe to 38% in Western Europe (31% in North America)18. The non-financial assets are mainly real estate. The available statistics do not allow a more detailed breakdown on the national level for most countries (and hence also not for regional groups of countries). The composition of wealth differs not only between countries but also within one country between types of households. For example, for households with medium wealth, residential property, bank accounts and insurance claims may be the dominant forms of wealth while HNWIs have invested most of their higher wealth in securities and prime commercial property. In such a setting the HNWIs benefit from booming stock markets and rapidly rising prime real estate prices, shifting the distribution of wealth further in favour of the richest individuals and households.

Wealth Creation

In principle, net wealth can grow by

• an increase of the volume of wealth objects,
• an increase of the prices of wealth objects,
• a decrease of liabilities,

Or a combination of these alternatives. Since global household wealth is growing but household debt is not decreasing (except in the United States), the growth of wealth must be due to an increase of the volume and/or price of the wealth objects.
The logic of accounting implies that the domestic household sector can increase the volume of wealth objects only if it disposes of fresh (additional) money: If existing money is used to buy a wealth item from another household or from another sector, this does not increase the net wealth: If the object is bought cash, the new wealth object substitutes the existing wealth object “money”. If the object is bought on credit, the household sector does not give up money but carries a new liability which equals the purchasing price of the new object. In neither case the net wealth changes. Apart from benevolent one-sided cross-sectoral transfers, the only way to increase the volume of wealth objects is via fresh money.
Fresh money can flow into the household sector from other sectors as wages of employees or profits of entrepreneurs. This inflow of fresh money (= current income) can be spent for consumption (= outflow from the household for non-wealth goods and services), for the purchase of wealth assets, or held cash or on deposits accounts.
Those parts of the fresh money that are not spent for consumption in the same period are household savings which increase the net wealth of the household sector. Wealth-enhancing savings can be

• spent to purchase wealth assets from non-household sectors (such as bonds previously held in the financial corporations sector or real estate from the non-financial corporations sector),
• paid into a deposit account (which is defined as a wealth item), or
• kept cash under the mattress (which is also a wealth item).

When savings are withdrawn from deposit accounts in a later period to finance consumption (e.g. a vacation or the lifestyle after retirement), then the household wealth decreases. As households withdraw funds in every period to finance consumption, savings do not increase the household wealth by the full amount of the savings but only by that amount which exceeds the withdrawals of the same period. But irrespective of this, it can be said that households increase their wealth by savings, and that the size of the increase varies with the volume of savings.
As new household wealth objects originate from savings, it is obvious that the level and growth of the income of the household sector is an important factor that the affects global wealth. A frequently used income measure is the GDP per capita on which distribution data are available for many countries. The relationship between income distribution and wealth distribution is strong enough to be used “to provide a rough estimate of wealth distribution for 135 other countries, which have data on income distribution but not on wealth ownership.” (Credit Suisse 2014b, p. 5).
One GWR identified for 2013 the GDP growth of 5.2% and the increase of the savings rate by 5.9% as the main drivers for newly created financial wealth of approx. US$4.1 trillion (Boston Consulting Group 2015, p. 5).

Factors Affecting Global Wealth via Income Growth

In a globalised world, the national income of one country and its growth is affected by the income level and growth trends of many other countries and by business cycles at home and abroad. Global interdependencies affecting global wealth are not only analysed in GWRs but also in macroeconomic analyses and forecasts of international institutions such as IMF (2015) or OECD (2015b). Frequently quoted factors affecting the growth of the GDP per capita and via savings the level and distribution of wealth are the following:

• the national savings ratio and the efficiency of the financial sector to transform savings into productive investments,
• the savings behaviour which is not only sensitive towards interest rates and inflation, but also influenced by political decision that affect the need of savings such as modifications of social security systems (e.g. requiring more private provisions for an adequate level of retirement income) or education systems (e.g. a move from free to paid higher education),
• trends of real wages and important input prices such as energy resources,
• the economic performance of major trading partners,
• political stability at home and in the region (and to a lesser degree globally),
• demographic trends such as population growth and rising longevity (creating particular issues for wealth in ageing societies) or changing family structures (with different household sizes and lifestyles),
• the participation of women in the labour force,
• inheritance laws (which may facilitate or hinder the undivided transfer of personal wealth to a single heir) and inheritance taxes, philanthropy of HNWIs (e.g. the transfer of wealth to charitable foundations),
• tax policies (directed at corporate, capital gains, inheritance, progressive income, and estate taxes),
• public housing programmes (with incentives to increase homeownership of low-income households).

Factors Affecting Global Wealth via Asset Prices and Investment Behaviour

The GDP and its growth alone cannot explain observable trends in global wealth.

• The ratios of household net wealth to disposable income increased for a period of 15 years (1994-2009) in five G7 countries by 12% to 66%21. This implies that the value of wealth grew considerably faster than income (or decreased less than income in years of contraction). This cannot be explained by an increase in the volume of wealth objects alone. Instead, rising prices of wealth objects must be taken into consideration.
• The global net worth per adult increased continuously from 2000 to 2007, but then dropped by 15% during the financial crises. In 2012 it had reached again the pre-crisis level22. The drop in wealth was not caused by the destruction of wealth objects but by a fall of asset prices, and the strong post-crisis recovery is mainly due to rising prices.

A GWR calculated that the increase of the value of existing financial assets by US$15.2 trillion in 2013 was driven by
the equity performance which improved by 20.6%. This was enough to over-compensate the weak bond and cash performance (of -0.6% and 0% respectively) (Boston Consulting Group 2014, p. 5).
There is a general agreement on the major factors responsible for the financial asset price boom of recent years, namely

• the persistent low-interest environment caused by monetary policy (quantitative easing),
• the meagre returns safe investments, and
• the increased readiness of financial institutions to take higher risks.

The search for yield in this environment boosted the demand for stocks and drove stock prices upward. The driving forces in this scenario were firms of the financial corporations sector.
It is a noteworthy finding of a GWR that the actors in the household sector behaved somewhat different and not primarily yield driven. In spite of rising stock prices, households particularly in Europe and Japan reduced their equity holdings. Because of the weak performance of bonds and the reduction of the equity positions, the growth of the financial household wealth is only due to higher stock prices and valuation gains of the existing portfolios.
Households placed their savings in bank deposits although interest rates were historically low and factually negative (as the inflation rate exceeded the interest rate). Investment decisions of households are seemingly not primarily driven by a search for yield but by more complex investment objectives such as a combination of loss avoidance (in view of high stock prices), nominal capital protection, and risk-minimized liquidity. A preference of the average households for safety and liquidity may have been the motive behind the strong inflow of money into the asset class “insurance and pension claims” with relatively low yields.

For HNWIs real estate was an attractive asset class because prices in prime locations in international cities such as London, Paris, and New York increased substantially. But for the average households, residential property was not a high-yielding asset as the markets for middle-class houses had returned to normality after the bursting of the real estate bubble before the financial crisis.

The big question is whether the factors which have affected the global wealth in recent years will also be effective in the foreseeable future. “The combination of unusual stock market growth, robust housing markets and favourable exchange rate movements is unlikely to be repeated soon, so future prospects for wealth are more muted. Indeed, they may well be negative if the downward trend in interest rates in recent years goes into reverse, and asset prices begin to fall.” (Credit Suisse 2014a, p. 13). But the Bank for International Settlements (2015, p. 6) strikes a different note: “Interest rates have never been so low for so long …Yet, exceptional as this situation may be, many expect it to continue. There is something deeply troubling when the unthinkable threatens to become routine.”