As a result, people are saving more and taking less investment risk, so it may be well into the next decade until individuals recover losses and surpass their 2007 wealth levels, according to a recent study by Allianz Global Investors.

In the study’s more pessimistic scenario, it might take until 2017 for US households and until 2012 for European households to win back the financial assets they have lost since 2007. This is likely in a slow economic recovery where unemployment is high and pay raises are modest or even negative.

The reduced disposable income in American, European and Japanese households would severely limit the potential to save. Even beyond these dates, annual asset growth rates could be sluggish during the next decade, according to the study, titled Private household financial assets: the golden days of the past are a long way off.

A major contributor to the dire predictions is the sheer scale of the drop in financial wealth, says the report. In Japan, Australia, North America and Europe, households jointly lost a total of almost $12 trillion (€9 trillion) in just one year. Savers have a mountain to climb just to return to 2007 levels.

The close correlation of all asset classes has compounded the problem. All over the world, equity markets closed the 2008 financial year with significant two-digit losses. “The slump is particularly severe because real estate markets have also crashed and investments are affected that had not previously been considered as having any significant correlation,” explains Dr. Renate Finke, author of the report. “In contrast to the past, this time a widely diversified portfolio offered little protection.”

It is easy to be gloomy about the outlook from here, says Dr. Finke. “The global economy is in the worst recession in 80 years and there are only weak signs of a recovery.” Even if indicators are optimistic, she warns, “No one can say what the situation will be like in 2010/2011, when the positive impulses from the current ambitious economic programs are likely to lose strength.” Yet, the base scenario also depicts another, more optimistic outcome. Here, the wide-ranging economic programs kick-start the recovery, and decreasing inflation rates give households more financial scope. But even so, recovery of financial assets will take some time, particularly in the US.

However, a more rapid recovery is possible. The report suggests financial assets could regain their pre-2008 levels faster and achieve healthier subsequent growth if households manage to increase regular savings, including greater contributions to pension schemes. Boosting their contributions could enable households to recover their 2007 financial wealth by 2010 in Europe and by 2013 in the US.

Also, a swift recovery in equity markets could  rapidly restore wealth levels. Global equities staged a strong rally between 2003 and 2007. A comparable rally of 25% in 2009, 10% in 2010 and 20% in 2011 would enable the US in particular to regain its 2007 savings levels as soon as 2011. But investors may have lost confidence in equity investments.

“Last year the shock waves that rolled through financial markets were the worst since the Great Depression of 1929. Investors’ confidence in the markets has been seriously impaired.” As a result, private households may not invest directly in the stock market and participate in the recovery, says Dr. Finke, “but they might profit indirectly through their involvement in pooled forms of investment.”

The law of unintended consequences may also have a negative role to play. If US households save more, this may actually hamper a global recovery, said Dr. Finke. “Higher savings means less consumption, which has been the main growth engine in the US for years. If Americans were to save just 1% of their disposable income of currently around $10.6 trillion (€7.6 trillion), then $106 billion (€76 billion) less would be spent on consumables.”

There are no obvious quick fixes to restoring the global economy while boosting the wealth level of private households. Yet, some things at least are clear. Dr. Finke concludes, “It seems unavoidable that, especially in countries where there are huge gaps in the pension funds, more will have to be saved and even then the recovery will be a long time coming.”

Published by PROJECT M in September 2009