Over the course of 2009, the McKinsey Global Institute has examined the economic impact of the financial crisis while shedding light on longer-term global trends that are reshaping the business landscape.

The MGI research suggests the full ramifications of the financial crisis will take years to play out and the forces fuelling growth in financial markets have changed: for the past 30 years, most of the overall increase in financial depth – the ratio of assets to GDP – was driven by rapid growth of equities and private debt in mature markets. By 2007, the total value of global financial assets reached a peak of $194 trillion, equal to 343 per cent of GDP. But the upheaval in financial markets in late 2008 marked a break in this trend.

Most notably, California-based MGI finds that:

• 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, MGI says 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 percentage of GDP than in the United States. Total US credit outstanding rose from 221 per cent of GDP in 2000 to 291 per cent in 2008, reaching $42 trillion. Eurozone indebtedness rose higher, to 304 per cent of GDP by the end of 2008, while UK borrowing climbed even higher, to 320 per cent.
• Financial globalisation has reversed, with cross-border capital flows falling by more than 80 per cent. 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 US 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 institute’s research also reveals:

Unleashing the Chinese consumer
Relative to China’s population and level of economic development, its consumers punch far below their weight. China’s consumption-to-GDP ratio is still the lowest of the world’s major economies, and it has fallen by nearly 15 per cent since 1990, despite robust GDP growth.
By pursuing a more aggressive programme of comprehensive reform, China’s leaders could raise private consumption above 50 per cent of GDP by 2025, bringing the consumption rate in line with other Asian countries and vaulting China’s economy into a new phase.
A more consumer-centric economy would generate more jobs, allocate capital and resources more efficiently, spread the benefits of growth more equitably, and also enrich the global economy with $1.9 trillion a year in net new consumption.

Changing the fortunes of America’s workforce: A human capital challenge
Global economic integration and technological advances have combined to produce permanent changes in the skill levels required to flourish in the US labour market. Seventy-one per cent of US workers are in jobs for which there has been a decrease in demand from employers, an increase in supply of eligible workers, or both, resulting in less-than-average income growth.
While there is no single cause or ‘silver bullet’ remedy for rising income dispersion, upgrading the productivity, skills and rewards in the service sector is the key challenge.
US consumers are spending less and saving more. Unless incomes grow faster, each percentage point increase in the saving rate would reduce spending by more than $100 billion – a serious drag on any recovery.

Beating the recession: Buying into new European consumer strategies
European consumers have already cut back their spending in response to the economic downturn and signs of an even deeper retrenchment are present.
Businesses need to tune into and sharpen their awareness of evolving consumer attitudes and tactics if they are to survive the recession and position themselves for economic recovery.

Lean Russia: Sustaining economic growth through improved productivity
Labour productivity in Russia remains low, but improvements over the past decade have been promising. In five sectors – steel, retail, retail banking, electric power, and residential construction – productivity now stands on average at 26 per cent of US levels.
Depending on the sector, inefficient business processes account for 30 to 80 per cent of Russia’s productivity gap with the United States. Obsolete capacity and production methods account for 20 to 60 per cent of the productivity gap, structural differences account for a smaller share of the gap at five to 15 per cent.