2022 was an annus horribilis for savers. Asset prices fell across the board in the "everything slump" scenario. The result was a dismal -2.7% decline in private households’ global financial assets, the strongest drop since the Global Financial Crisis (GFC) in 2008. But some asset classes suffered more than others: While securities (-7.3%) and insurance/pensions (-4.6%) saw strong setbacks, bank deposits showed robust growth at +6.0%, broadly in line with the long-term trend before the Covid-19 pandemic. Overall, financial assets worth EUR6.6trn were lost, with total financial assets amounting to EUR233trn at the end of 2022.
The world saves very differently
Over the last two decades, however, securities have been the clear “winner”: their share in the global portfolio increased by almost 6pps to 41% of total financial assets. On the other hand, insurance/pensions lost almost 6pps to 27% while bank deposits held up (+1pp to 30%). However, the differences between the regions are striking. Insurance/pensions, for example, hardly play a role in Eastern Europe but are the dominant asset class in Western Europe (as well as Australia). The same can be said about bank deposits: while they play only a minor role in the Americas, they are the most popular savings vehicle in Eastern Europe and Asia – with the exception of China, where so-called wealth-management products used to be very popular. In contrast, Americans rely mainly on securities, especially stocks and mutual funds.
Turning their backs on banks
Fresh savings declined by -24% in 2022 – no surprise after two years of pandemic-induced forced savings. However, at EUR3.8trn, they still remain above the 2019 level (EUR3.6trn). As a result, more remarkable than the decline in savings is the change in the composition of funds: Bank deposits fell by a whopping -79%, mainly because American savers withdrew funds. In other regions, bank deposits were not liquidated, but new allocations fell sharply, for example by -26% in Western Europe and by -35% in Japan. In contrast, twice as many securities were purchased globally as in 2021. Once again, US households were the driving force: securities purchases tripled in the US. In Western Europe, despite declining, securities purchases remained at an extremely high level of over EUR200bn. Inflows of fresh funds into insurance/pensions rose by +17% in 2022 and here, too, it was primarily US savers who used the opportunity of increased savings to top up their retirement provisions.
Riding the market wave
Over the long term, the heavily capital markets-oriented US savings behavior has proven to be very smart. There are two sources of growth in financial assets: savings efforts and price increases (increases in value). Over the past 20 years, increases in value have contributed an average of 62% to annual growth in North America; in Western Europe this figure is 37%, and in Germany, growth over the long term has been driven exclusively by fresh savings. This significant difference certainly contributes to the fact that long-term financial asset growth is about 50% higher on the other side of the pond. In general, smart savings behavior is the key to higher wealth growth as returns increase with the level of financial literacy. The difference between low and average financial literacy can reach 1.5pp p.a. Over long investment periods, financial illiteracy can cost a fortune, literally.
Sometimes it hurts instead
In 2022, however, being smart did not pay off: at -6.2%, the decline in financial assets was most pronounced in North America, followed by Western Europe (-4.8%). Asia, on the other hand – with the exception of Japan – still recorded relatively strong growth rates. In emerging markets such as Indonesia, Cambodia or the Philippines, growth was even in the double digits. China's financial assets grew robustly, too, clocking growth of +6.9%. But compared to the previous year (+13.3%) and the long-term average of the last 20 years (+15.9%), this was a rather disappointing development – repeated lockdowns clearly took their toll.
The undisputed hegemon in finance
This different pace of growth has led to shifts in the regional composition of global financial assets. In the last year alone, for example, China's share has risen by 1pp to 14.1%; over the last two decades, its share of global financial assets has increased six-fold. On the other hand, Japan and Western Europe has lost out big time (-17.5pps combined). In sharp contrast, North America has been able to maintain its weight at 47%. The American supremacy is also reflected in per capita financial assets, at least when looking at the averages. In fact, only the Swiss (EUR356,310) are still richer than the Americans (EUR307,940). All other countries follow at a fair distance. Adjusted by liabilities, however, the US overtakes Switzerland (EUR253,450 vs EUR238,780).
The inflation wedge
Adjusting the long-term development of financial assets by inflation is a sobering exercise. Worldwide, average per capita financial assets saw an almost four-fold increase over the last two decades. But adjusted for purchasing power, the rate is just +69%. In Western Europe, assets trebled before inflation; after inflation, the increase is a meagre +40% in 20 years, just a tad above Japan (+38%) and only about half the increase in North America (+74%). Only one country bucks the trend: China. After adjustment for inflation, the figures turn out to be lower in the Middle Kingdom, too, but a more than ten-fold increase in the purchasing power of financial assets is an unprecedented achievement; no other country or region can match it.
Excess savings? What excess savings?
Despite bitter losses, global household financial assets were still nearly 19% above pre-Covid-19 levels at the end of last year – in nominal terms. But adjusted for inflation, global household financial assets were only 6.6% above the 2019 level; that means almost two-thirds of (nominal) wealth growth fell victim to price increases. While most regions could at least preserve some real growth, the situation in Western Europe was different: Any nominal gains in financial wealth were wiped out: real wealth decreased by -2.6% over 2019. In absolute terms, this translates into an asset loss of EUR1.1trn compared to 2019: excess savings in Western Europe now exist only on paper.
After the decline in 2022, global financial assets should return to growth in 2023. This is supported above all by the (so far) positive development on the stock markets, even if setbacks are still to be expected until the end of the year. All in all, we expect global financial assets to increase by around +6%, also taking into account a further "normalization" of savings behavior. Given a global inflation rate of around 6% in 2023, savers around the world should be spared another year of real losses on their financial assets. But the mid-term outlook is rather mixed. Given that prices will very likely remain above the 2% target for the time being for structural reasons, the monetary stance will at best be neutral: monetary tailwinds will not blow. Strong economic tailwinds also cannot be expected. The recovery of big economies such as the Eurozone and the US might be rather lackluster, and the Chinese economy has ceased to be the global growth engine. Therefore, average growth of financial assets is likely to hover between +4% and +5% over the next three years, under the assumption of “normal” stock market returns. But like the weather, which gets more extreme amid climate change, more market swings are to be expected in the new geopolitical and economic landscape. “Normal” years might rather become the exception.
Rising interest rates bite
The interest rate turnaround was also clearly felt on the liabilities side of the private household balance sheet. After global private debt had risen by +7.8% in 2021, growth weakened significantly last year to +5.7%. The sharpest fall was seen in China: last year's debt growth of +5.4% was not only well below the growth in 2021 (+13.9%) but the lowest rate on record. Overall, global household liabilities totaled EUR55.8trn at the end of 2022. At the same time, the gap between debt and economic growth widened to 3.9pps in 2022. As a result, the global debt-to-GDP ratio (liabilities as a percentage of GDP) has fallen significantly by more than 2pps to 66.1%. This means that the global debt ratio for private households is back at about the same level as it was at the beginning of the millennium – a remarkable level of stability that hardly fits the widespread narrative of a world drowning in debt.
However, there have been major shifts in the world debt map. First and foremost, stability characterizes the development in advanced economies such as North America, Japan or Western Europe, where the debt ratio – despite temporary outliers during the GFC – has hardly changed over the long term. In contrast to financial assets, the position of North America has even "deteriorated" from a share of 44.8% of global debt to 36.5%. Western Europe and Japan are also experiencing equally sharp declines. On the other hand, most emerging markets have seen their debt ratios rise sharply over the last two decades. China is at the top of the list, with a ratio that has more than tripled to a good 61%. Its share of the global debt mountain has literally exploded from 1.5% to 18%. Chinese households now account for more than half of all private liabilities in Asia (including Japan).
A bad year for advanced markets
Declining assets and rising liabilities mean that global net financial assets (financial assets minus liabilities) fell significantly in 2022 by -5.1%, the worst performance since the GFC (-11.8%). Overall, global net financial assets amount to just under EUR177trn at the end of 2022, down EUR9.6trn compared to the previous year. However, advanced regions such as North America and Western Europe recorded the strongest declines. In other regions, especially in Asia and Eastern Europe, assets continued to grow faster than debt in 2022, resulting in strongly rising net financial assets. Over the long run, however, debt growth exceeded that of assets in emerging markets; in the advanced economies, it was generally the other way round.
China and the shrinking wealth gap
In 2022, wealth growth in advanced economies trailed behind that of emerging markets. In terms of net financial assets, for instance, the latter achieved a growth advantage of 12.5pps, returning to the old pattern of growth after a five-year hiatus during which growth was around 9pps higher. This has had a positive impact on the wealth gap between poorer and richer countries: The net financial assets ratio fell back from over 20 to 18, a value already reached in 2016. Against this background, the number of members of the global middle wealth (MW) class has also risen again compared to last year's report to around just under 780mn. Since 2002, the MW class has increased by +58%, while the global high wealth (HW) class has jumped by as much as +63% (to 650mn). However, closer analysis reveals that these major shifts in the world wealth map reflect China's incredible upswing above all. The rise of households into the global MW and HW classes was much slower in the rest of Asia and even more so in Latin America and Eastern Europe.
The growing gulf
The concentration of financial assets on a global scale remains extremely high. The richest 10% of the world's population – around 560mn people in the countries under consideration with an average net financial assets of around EUR270,000 – together own 85% of total net financial assets in 2022. At least the share has fallen over time; two decades ago, it still stood at 91%. As a result of this high global wealth concentration, there is also a large gap between the global median and the global average of net financial assets. While the median of net financial assets in 2022 was EUR1,920 per capita, the average was more than 16 times higher (EUR31,860). Although this ratio has improved over time, the gulf is only growing in absolute terms. While in 2002 the median and mean were “separated” by roughly EUR10,000, today the figure is twice as high. Another example of the growing wealth gap: Whereas in 2002 belonging to the richest global decile required net financial assets of at least EUR53,000, this threshold has moved significantly higher over the years. In 2022, at least EUR150,000 was necessary for entry into the club of the richest 10%.
The analysis of the national wealth distribution is disillusioning. There have been improvements only in a few countries and mainly in those with previously (and still today) very unequal distribution, such as South Africa and Türkiye. In contrast, wealth distribution has (further) deteriorated in many large emerging markets, including Brazil, Mexico and Russia, but also India and China. In most cases, this was driven by outrageous wealth growth at the very top. Even more worrying, however, is the development in advanced economies. High inequality has been seen as one of the great social challenges for years – but nothing has been done about it. Cementing a distribution situation that is perceived as unjust is a creeping social poison. And the challenge is not getting any smaller. In the past decade, monetary and fiscal policy could operate almost without restraint. But the next few years promise much more difficult conditions to initiate a turnaround in wealth distribution.