|
 Farewell to Cheap Capital?
The implications of long-term shifts in global investment and saving
The recent bursting of the global credit bubble followed three decades in which capital became progressively cheaper and more readily available. Today, interest rates remain very low for several reasons, including economic weakness in developed economies, little demand for new credit by heavily indebted households, and central bank monetary policies aimed at stimulating growth. Many people have come to believe that low interest rates now are the norm.
But our analysis suggests that this low-interest-rate environment is likely to end in the coming years. We find that the long-term trends in global saving1 and investment2 that contributed to low rates in the past will reverse in the decades ahead. The primary reason is that developing economies are embarking on one of the biggest building booms in history.
Rapid urbanization is increasing the demand for new roads, ports, water and power systems, schools, hospitals, and other public infrastructure. Companies are building new plants and buying machinery, while workers are upgrading their housing. At the same time, aging populations and China’s efforts to boost domestic consumption will constrain growth in global savings.
The world may therefore be entering a new era in which the desire to invest exceeds the willingness to save, pushing real interest rates up. Higher capital costs would benefit savers and perhaps lead to more restrained borrowing behavior than we saw during the bubble years. However, they would also constrain investment and ultimately slow global growth somewhat.
Among our key findings:
- The investment rate (investment as a share of GDP) of mature economies has declined significantly since the 1970s, with investment from 1980 through 2008 totaling $20 trillion less than if the investment rate had remained stable. This substantial decline in the demand for capital is an often overlooked contributor to the three-decade-long fall in real interest rates that helped feed the global credit bubble.
- The world is now at the start of another potentially enormous wave of capital investment, this time driven primarily by emerging markets.3 We project that by 2020, global investment demand could reach levels not seen since the postwar rebuilding of Europe and Japan and the era of high growth in mature economies.
- The coming investment boom will put sustained upward pressure on real interest rates unless global saving increases significantly. In most scenarios of future economic growth, our analysis of saving suggests that it will not increase enough, leaving a substantial gap between the willingness to save and the desire to invest.
- This difference between the demand for capital to invest and the supply of saving will likely increase real long-term interest rates. That, in turn, will reduce realized investment and may prompt more saving, bringing the two into equilibrium. We do not predict how much interest rates will increase, but we find that if they were to return to their average since the early 1970s, they would rise by about 150 basis points. And real long-term rates may start moving up within five years as investors start to price this long-term structural shift.
- These findings have important implications for business executives, financial institutions, consumers, investors, and government policy makers. All will have to adapt to a world in which capital is more costly and less plentiful, and in which more than half the world’s saving and investment occurs in emerging markets. Business models will have to evolve, investors may develop new strategies, and government could play an important role in easing the transition.
Download Farewell to Cheap Capital? The implications of long-term shifts in global investment and saving
PDF format, 2.5MB, 106Pages.
McKinsey Global Institute
Contents
Executive summary 9
1. A new view of the “global saving glut” 17
2. The coming global investment boom 33
3. Farewell to cheap capital 43
4. Adapting to the new world 57
Appendix A: Technical notes 67
Appendix B: Country detail 85
Bibliography 93
The McKinsey Global Institute
The McKinsey Global Institute (MGI), established in 1990, is McKinsey & Company’s business and economics research arm.
MGI’s mission is to help leaders in the commercial, public, and social sectors develop a deeper understanding of the evolution of the global economy and to provide a fact base that contributes to decision making on critical management and policy issues.
 |
Subscribe to the RSS feed.