Hamish McRae: March of the middle class powers global wealth rise
Economic View: The shift towards self-made wealth will increase as the balance of wealthy people moves from West to East
Thursday 11 October 2012
Britons are becoming poorer. I think we knew that. But if it is any consolation, the Germans, French and Italians are become poorer even faster. Credit Suisse, the Swiss bank, has just produced its new global wealth report, prepared jointly with Professors Anthony Shorrocks and Jim Davies, which looks at what has happened to wealth in the world over the past year and how that wealth is distributed. Wealth is calculated by looking at individual holdings of property and financial securities and then deducting people's debts.
Click HERE to view graphic
The headlines are that global wealth fell by 5.2 per cent last year to $223 trillion (£139trn), with most of that decline happening in Europe. There was some loss of wealth in Asia, taken as a whole, and in Africa, and a modest increase in North America and China. The biggest losers were people in France, Italy, Germany and Spain; the biggest gainers, the US and China.
This is pretty much as you might expect, as such changes are very sensitive to changes in exchange rates: the study converts everything into dollars. If you look at the stock of wealth, rather than changes to it, Europe and North America remain the richest regions. But China is racing upwards, adding fastest to the global middle and upper-middle ranks. China is number three in terms of people in the top 10 per cent of the world's wealthy, after the US and Japan. There is a massive contrast between China and India in the development of a prosperous middle class. India has just 3 per cent of the global middle class, whereas China accounts for more than one third of it.
As you go up the scale, the US tends to dominate. There are various gradations for the wealthy. People are classified as "high wealth" if they have more than $100,000 in net assets. The next grade up, the high-net-worth individuals, or HNWIs, have more than $1m in investable assets, in addition to their main home. There are very-high-net-worth individuals with more than $5m to invest, and at the top of the pile there are ultra-high-net-worth individuals, defined by Credit Suisse as having more than $50m to invest, and the billionaires.
The pie chart shows dollar millionaires by country of residence; interesting how many rich people there are in socialist France. And the bar chart shows the UHNWIs, the people with more than $50m, and an additional segment of those with more than $100m. As you can see there are some 25,000 people in the US with more than $50m, and a further 13,000 with more than $100m. In the UK the comparable figures are 2,500 and 1,000. There are nearly 5,000 UHNWIs in China and the same again, added together, in Russia, Brazil and India.
Two questions: how much of this wealth is earned by the people who have it and what will the future bring? On the first, the general pattern of the past 30 years has been for the proportion of wealth that is inherited to decline and the proportion that is earned to rise. In the developed world inherited wealth accounts for between 30 per cent and 50 per cent of the total, whereas in the emerging world, the wealthy are mostly self made. That shift towards self-made wealth will increase in the future as the balance of wealthy people moves from West to East.
The study projects that world wealth will increase to $330trn by 2017. China will pass Japan as having the second-largest stock of wealth. At the top end, there will be many more millionaires in the emerging world, but still decent increases in wealth in the developed world. The number of dollar millionaires in the UK will rise from 1.6 million at present to nearly 2.7 million. These calculations do inevitably have to make assumptions about what will happen to house prices and the stock market, so one should take the projections for what they are: interesting but subject to a reasonable and sustained economic recovery.
Still, they do give a feeling for one of the most striking phenomena of our times. It is not just wealth at the top that is spreading across continents; it is a growth of the new global middle class. In the next five years there are likely to be another 275 million adults joining the middle class in China, and another 40 million in India. We should surely welcome that.
IMF is trying to be wise after the event on crash
The IMF has made a sharp downgrade to its UK growth forecasts, which received a lot of publicity and which opponents of the Coalition seized on with a certain glee.
Much less widely reported was some work by the fund's economists looking at what went wrong in the UK in the run-up to the 2008 crash.
It now believes we were running above our long-term potential gain in output right through from 1999 to 2007. At the peak the economy, puffed by the housing boom and high government spending had an output gap (the amount it was running above its sustainable level) of 3.65 per cent. That was even larger than at the peak of the late 1980s boom.
Commenting on this, Michael Saunders at Citigroup notes: "With such a large cyclical boost from revenues in the boom, the IMF has again revised up its estimate for the cyclically adjusted fiscal deficit in 2007 to 5.2 per cent of GDP, again by far the biggest structural deficit among the G7 countries."
So Gordon Brown, having avowed not to make the same mistake as the Tories of stoking up an unsustainable boom, ended up doing just that, only worse.
But the blame is not entirely his. I had a look at what the IMF was saying back in 2007. Was it warning about the fiscal deficit? Well, not really. In its World Economic Outlook of April 2007 there is a nice little table on page 26, part of an article on long-term fiscal stability. The estimate there for the UK's "structural primary balance" in 2005 was minus 1.5 per cent, lower than in the US and Japan.
My reaction to that is twofold. One is "Gee, thanks." If only they had said something then we would at least have been warned. And the second is that if the IMF economists could get things so wrong then, why on earth should we trust their judgment now?
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