Read the full paper here, but here’s our breakdown of the report:
- Falling real interest rates: Decreased real interest rates have spurred borrowing and investment, reducing the cost of loans and bonds. This has led to capital chasing limited productive investment opportunities and inflating the prices of real estate and equity.
- Low-interest rates: The current environment has made it cheaper for households to borrow against assets like homes and for companies to accrue more debt to finance mergers, share buybacks, and cash buffers. This has amplified asset prices.
- Rising corporate earnings: Corporate earnings, especially for large companies, have seen a significant increase as a share of GDP in the U.S. This has boosted equity valuations and balance sheet growth.
- High savings: Factors such as rising inequality, ageing population, and current account surpluses in certain countries have led to excess savings. This 'glut' of savings has flowed into existing asset markets, driving up prices.
- Quantitative easing: Central banks' large-scale asset purchase programs in response to the financial crisis and pandemic have also supported higher asset prices.
The stress in the current financial system may suggest a fundamental shift in how economies grow relative to GDP. It's crucial that we focus on higher productivity growth through investment and technology to achieve sustainable wealth and income growth while also preparing for less favourable scenarios due to the high uncertainty.
Here are the four potential scenarios Mckinsey Global Instutitute anticipates for 2030.
- "Return to past era": Balance sheet expansion continues but at the expense of real economic output growth. Wealth increases but remains vulnerable.
- "Higher for longer": Persistently high inflation and interest rates. Balance sheet shrinks relative to GDP but solid income growth and improved stability.
- "Balance sheet reset": Asset correction and deleveraging lead to prolonged recession and lost decade of GDP growth. Wealth declines sharply.
- "Productivity acceleration": Investment and productivity growth support 1% higher GDP growth. The balance sheet shrinks slightly relative to the growing GDP, but wealth increases sustainably.