De-globalisation

McKinsey generally have the best coverage of global capital flows and their latest report shows just how significant the global financial crisis has been for financial globalisation.

In its latest report Global capital markets: Entering a new era McKinsey reports that:

World financial assets fell $16 trillion to $178 trillion in 2008, marking the largest setback on record and a break in the three-decade-long expansion of global capital markets. Looking ahead, mature financial markets may be headed for slower growth, while emerging markets will likely account for an increasing share of global asset growth.

Financial globalization reversed in the wake of the crisis. Capital flows fell 82 percent in 2008, to just $1.9 trillion from $10.5 trillion in 2007.

Declines in equity and real estate values wiped out $28.8 trillion of global wealth in 2008 and the first half of 2009.

Other pertinent points made:

Falling equities accounted for virtually all of the drop in global financial assets. The world's equities lost almost half their value in 2008, declining by $28 trillion. Markets have regained some ground in recent months, replacing $4.6 trillion in value between December 2008 and the end of July 2009. Global residential real estate values fell by $3.4 trillion in 2008 and nearly $2 trillion more in the first quarter of 2009. Combining these figures, we see that declines in equity and real estate wiped out $28.8 trillion of global wealth in 2008 and the first half of 2009.


Credit bubbles grew both in the United States and Europe before the crisis. Contrary to popular perceptions, credit in Europe grew larger as a percent of GDP than in the United States. Total US credit outstanding rose from 221 percent of GDP in 2000 to 291 percent in 2008, reaching $42 trillion. Eurozone indebtedness rose higher, to 304 percent of GDP by the end of 2008, while UK borrowing climbed even higher, to 320 percent.

Financial globalization has reversed, with cross-border capital flows falling by more than 80 percent. It is unclear how quickly capital flows will revive or whether financial markets will become less globally integrated.

Some global imbalances may be receding. The U.S. current account deficit—and the surpluses in China, Germany, and Japan that helped fund it—has narrowed. However, this may be a temporary effect of the crisis rather than a long-term structural shift.

Mature financial markets may be headed for slower growth in the years to come. Private debt and equity are likely to grow more slowly as households and businesses reduce their debt burdens and as corporate earnings fall back to long-term trends. In contrast, large fiscal deficits will cause government debt to soar.

For emerging markets, the current crisis is likely to be no more than a temporary interruption in their financial market development, because the underlying sources of growth remain strong. For investors and financial intermediaries alike, emerging markets will become more important as their share of global capital markets continues to expand.

The major issue in the short-term will be how quickly capital flows recover. Another key issue is how slower growth in mature markets will affect emerging markets' financial systems.

The severity of the also highlights just how amazing it is that Australia managed to avoid a downturn in growth over the 2008-09 financial year. For Tony Abbot to argue that the Rudd govt has achieved little in its first couple of years and for some economists to argue that the fiscal stimulus has been profoundly negative defies any logic. Instead it appears to be simple oppositional politics for the former and blind anti-govt rhetoric for the latter.

If it sounds unlikely, it probably is.