Earn more, own more, as a rule

PUBLISHED : Monday, 21 November, 2011, 12:00am
UPDATED : Monday, 21 November, 2011, 12:00am


A century of data shows that many factors influence the evolution of household wealth.

These include property rights and other institutional considerations, the maturity of financial markets and financial instruments and the extent to which public provision of retirement pensions and health care mitigate the need for private accumulation.

These factors are among the findings of the Credit Suisse Global Wealth Report 2011.

But the most important factor in the evolution of household wealth in developed economies is household income. Statistics show that the contribution of income to household wealth tends to be higher during times of high inflation.

'If we look back to the wealth data for France, the UK and the US dating back to 1900, the wealth-income ratio in the US and UK was relatively stable for most of the past century,' says Michael O'Sullivan, head of strategy, thematics and portfolio analysis in Credit Suisse's private banking division. He says upward deviations occurred only on two occasions - the Depression and the ongoing credit crisis.

The graph shows that the average wealth-income ratio for 16 rich countries, 6.35, was nearly double the 3.25 for nine emerging markets (Chile, China, Colombia, Czech Republic, India, Slovakia, Slovenia, South Africa and Ukraine).

Looking at just the net financial assets (light-blue bars), the difference is even more striking. The average asset-to-income ratio is exactly one in emerging markets, barely 40 per cent of the figure of 2.4 recorded in high-income countries.

China is the exception among emerging markets. With a net wealth-income ratio approaching seven, it ranks within the top third of the high-income country league table, close to the level of Japan, and well above the figure for the US. The household savings rate in China has exceeded 20 per cent of GDP since the early 1990s, says O'Sullivan. It has risen slightly in recent years, owing to increases in income uncertainty and changes in pension provision.

This, alongside high prices for housing and stocks, the latter resulting from intense international demand, may help explain the anomalous wealth-income ratio in China.

'It may also be the case that although asset values in China are already close to rich country levels, household income has yet to catch up,' he says. 'Based on the experience of more mature economies during the 20th century, emerging markets have considerable scope to increase personal wealth. This is because the ratio of net financial assets to income in mature economies is more than twice as high, and the debt-income ratio is five times greater.'

It seems likely that household wealth will grow faster than household income in emerging markets, O'Sullivan says. This will raise the wealth-income ratio over time, although it will stop short of the inflated levels seen in rich countries in recent years.

'Increasing life expectancy and longer retirement, ageing populations and increasing uncertainty about labour earnings and future health costs are all factors that point to an increase in the need for private wealth,' he says.