In 2018, global financial assets recorded a decline – for the first time since the financial crisis:

  • Convergence between wealthy and poorer countries comes to a halt
  • Debt growth remains at a high level
  • Poland: growth in financial assets declines
  • Stagnation in middle-class wealth

Allianz has announced the tenth edition of its Global Wealth Report (Global Wealth Report 2019), which brings together findings on the financial assets and debt of households from more than 50 countries around the world. The sad truth emerging from the report is that in 2018, financial assets in industrialised and emerging countries recorded a simultaneous decline for the first time in years. Even in 2008, the peak of the global financial crisis, there was no such decline.

– On the one hand, the escalating trade conflict between the United States and China, the never-ending “Brexit saga” and rising geopolitical tensions, and on the other, tightening monetary conditions and the (announced) normalisation of monetary policy.

Stock markets reacted accordingly. Global share prices fell by 12% in 2018. This had a direct impact on asset growth. Gross financial assets of private households worldwide fell by 0.1% and remained roughly at EUR 172.5 trillion. Growing uncertainty is taking its toll – says Michael Heise, chief economist at Allianz.

The dismantling of the rules-based global economic order poses a threat to wealth accumulation. The asset growth figures also show that trade is not a zero-sum game. Either everyone is on the winning side – as has been the case in the past – or on the losing side – as was the case last year. Aggressive protectionism has no winners.

Convergence between poorer and richer countries comes to a halt

In 2018, gross financial assets in emerging markets not only fell for the first time in years, but the 0.4% decline was more pronounced than in industrialised countries (0.1%). Weak development in China, where assets fell by 3.4%, played a key role. However, other significant emerging markets such as Mexico and South Africa also recorded substantial losses in 2018. This is an unusual reversal of the previous trend.

Over the past two decades, growth in financial assets in poorer regions was on average 11.2% higher than in wealthier ones – even taking into account the 2018 data. It appears that trade disputes have brought the process of poorer countries catching up to a halt. However, industrialised countries did not benefit from this either. Japan (-1.2%), Western Europe (-0.2%) and North America (-0.3%) all had to contend with negative asset growth.

Eastern Europe: the new growth leader

In 2018, gross financial assets of households in Eastern Europe rose by 8%. For the first time since 2011, the region grew faster than the other two emerging regions: Latin America (+7.1%) and Asia excluding Japan (-0.9%). The significant increase was mainly due to rapid growth in non-EU countries such as Turkey and Russia. An analysis of portfolio structures shows surprisingly stable savings behaviour in Eastern Europe. For example, the share of bank deposits remained more or less unchanged over the past two decades and stands at around 55%.

At the other end of the spectrum is Asia, where the share of deposits fell by 16%, as savers made use of more sophisticated savings products. In Eastern Europe, this was not the case – the share of securities, i.e. savings invested in capital markets, even declined slightly. The share of insurance and pensions has also been falling steadily since 2010 – at 10.5% it is significantly lower than in the other two emerging regions and amounts to only one third of the global level.

- This is a certain paradox related to savings behaviour – says Michaela Grimm, co-author of the report.

- Eastern European countries are ageing rapidly and many people are saving more to increase the value of their pensions. However, they do not appear to be embracing the products that provide the most effective protection for old age, namely life and annuity insurance. Digitalisation should therefore be seen as a desirable lever, offering attractive solutions in this area. Eastern Europe must prepare for the approaching “demographic tsunami”.

 

Growth in liabilities stabilises at a high level

In 2018, household liabilities worldwide rose by 5.7%. This is slightly below the previous year's level (6%), but well above the long-term average annual growth rate of 3.6%. However, the global debt ratio (liabilities as a percentage of GDP) remained stable – at 65.1% – thanks to still strong economic growth. Most regions saw similar developments in this respect. In Eastern Europe, the debt ratio has not even changed significantly since the financial crisis. This contrasts sharply with Asia (excluding Japan), where it rose by more than 20% over the past decade.

- The debt dynamics in Asia, and especially in China, are worrying – says Patricia Pelayo Romero, co-author of the report. - Chinese households are already relatively as indebted as, for example, German or Italian ones. The last time we witnessed such rapid growth in private debt was in the US, Spain and Ireland shortly before the financial crisis. Compared with most industrialised countries, debt levels in China are still significantly lower. However, supervisory agencies should not merely observe this process passively. Debt-driven growth is not sustainable - even China is not immune to a debt crisis – she adds.

Due to strong growth in liabilities, net financial assets, i.e. the difference between gross financial assets and debt, fell worldwide by 1.9% to EUR 129.8 trillion at the end of 2018. Emerging countries in particular recorded a drastic decline: net financial assets decreased by 5.7% (industrialised countries: -1.1%); Eastern Europe, meanwhile, recorded growth of 6.6%.

Poland: Growth in financial assets declines

The gross financial assets of Polish households rose by only 1.9% in 2018, the lowest growth since the financial crisis; over the decade since then, average annual growth of 8.3% was achieved. This dismal result was driven by sharp declines in two asset classes: securities (-7.2%) and insurance and pensions (-7.4%). On the other hand, bank deposits, which account for around half of all financial assets, rose sharply by 10.0%. Growth in liabilities accelerated to 7.1% and was the highest result in the past seven years. However, thanks to still strong economic growth, the household debt ratio remained at around 35.6%; in fact, it has been around 35% since 2010.

Eastern European countries are on the rise

As a result of weak asset growth and rapidly rising liabilities, net financial assets in Poland fell by 0.8% in 2018, the first decline since 2011. With net financial assets per capita of EUR 8,080, Poland remained in 36th place in the ranking of the wealthiest countries. At the top of the ranking, the US once again replaced Switzerland, driven in particular by the strong position of the dollar. Looking at the longer-term changes in the list since the turn of the century, the rise of Eastern European countries is visible: the winners are the three Baltic states (+6 places), but also Russia (+6 places), Bulgaria (+4 places) and Romania (+2 places).

Just a bump in the road?

For the first time in more than a decade, the global wealth middle class did not grow: at the end of 2018, around 1,040 million people (including around 11 million Poles) belonged to the global wealth middle class – roughly the same number as a year earlier. Against the backdrop of shrinking assets in China, this is not a great surprise. Until now, the emergence of a new global middle class has been mainly a Chinese affair: almost half of its members speak Chinese, as do 25% of the wealthy upper class.

- There is still plenty of potential for global prosperity – says Arne Holzhausen, co-author of the report. - If in other densely populated countries such as Brazil, Russia, Indonesia and especially India, the level and distribution of wealth were comparable to China, the global middle class would be strengthened by around 350 million people, and the global upper class by around 200 million people.

In turn, the global distribution of wealth would be somewhat more equal: at the end of 2018, the wealthiest 10% of the world's population owned around 82% of all net financial assets. Questioning globalisation and free trade deprives millions of people around the world of their opportunity to move up between classes.