The US faces a $48 trillion moment of truth this decade that could see it lapsing into a Japan-like funk of collapsing asset prices and meager economic growth or breaking through to a period of accelerated productivity and greater prosperity.
That’s one of the take-aways from a new report by the research arm of consultants McKinsey & Co that looks at a variety of scenarios of how the world economy and financial markets will evolve in the coming years, and how much wealth and output will be generated.
“The future of wealth and growth hangs in the balance,” the McKinsey Global Institute said in the report.
After years of secular stagnation, in which asset prices rose while economic growth lagged, the world is showing signs of tectonic change coming out of the pandemic as inflation surged to levels not seen in decades and geopolitical tensions escalate.
“The chances that the next 20 years will look markedly different from the past 20 years are high, but it’s not a certainty,” Jan Mischke, a partner at the McKinsey Global Institute in Zurich, said in an interview.
Three of the four paths the institute considers – a return to economic malaise, the dawn of a higher inflation age and a Japan-like meltdown in asset markets – are far from ideal. “Two are ‘pick your poison’ and the third a double dose,” the report said.
In the first, paper wealth continues to climb but growth sags. In the second, the economy strengthens a bit but asset prices suffer. In the third, both economic growth and financial markets deteriorate.
“The most desirable outcome is to accelerate productivity,” McKinsey said. “Only this scenario combines strong growth in income, wealth and balance sheet health.”
Under that outcome, household wealth rises $17 trillion, ending $48 trillion higher in 2030 than in the Japan-like scenario.
Achieving faster productivity growth, though, won’t be easy, according to McKinsey.
“Monetary and fiscal policy makers face a predicament: fail to tighten enough, and inflation stays uncomfortably high; tighten too much, and wealth and the financial system face stress,” the report said. “Without faster GDP growth, the line between these outcomes may be very thin.”
