Joeri de Wilde: There is nothing resilient about increasing inequality

May 14, 2024

^{This column was originally written in Dutch. This is an English translation.}

By Joeri de Wilde, Investment Strategist at Triodos Investment Management

The 'resilience' of the global economy is partly due to rising stock markets and house prices. It is rather misplaced to label these two signs of structural and ever-increasing inequality as resilience.

In the past two years, resilience has become the most popular word to describe the state of the global economy. In their recent economic outlook, IMF and OECD once again emphasize the surprising resilience of the global economy: they see stable economic growth despite higher interest rates, sharp price increases, and a food and energy crisis as a result of the war in Ukraine. Both agencies explain this resilience by pointing to the extensive government support and the extra savings buffer that households have built up during the COVID lockdowns.

Asset effect explains 'resilience'

However, these factors only partly explain why consumption has continued to rise happily (United States) or 'only' stagnated (eurozone) since the beginning of 2023. Ultimately, it all comes down to the total wealth of households. Only when this total wealth increases do households feel richer and start spending (more). Economists call this the wealth effect. At a macro level, the value of the house and the accrued pension are by far the most important components of total household wealth, followed at an appropriate distance by savings and the share portfolio. But pension funds may play less of a role in this wealth effect, because they are less transparent for many households and they are only released after retirement.

That leaves the cocktail of house prices, shares and savings. Savings therefore increased, but more importantly, house prices and stock markets also rose sharply in recent years. This largely explains the continued consumption. Compared to February 2020, just before the pandemic, house prices in both the Netherlands and the US have risen by 34% so far, and the MSCI World is up by around 40%. It is therefore no wonder that households felt quite comfortable at a macro level and dared to continue spending.

Distribution extremely skewed

But this so-called resilience at the macro level says nothing about the distribution between the different income groups. If we dig a little deeper into this, the classification of resilience seems quite misplaced. Most households belong to the lower and middle income group and do not own a house or shares. Only 13% of the total house value - in both the Netherlands and the United States - can be attributed to the poorest 40% of households. For share ownership, the distribution is even more skewed: Dutch and Americans who belong to the bottom 60% (!) of incomes own only 22% and 7% respectively of the total share value.

The total capital growth therefore mainly benefits the smaller, richer part of the population. But why does the macro data indicate that a large part of the population has continued to consume? This is partly because the significant increase in the wealth of a small group of households also affects the confidence of consumers without significant wealth. The extensive media attention to the rise in share prices and house prices positively influences economic expectations and thus (the growth of) personal income among the entire population. Indirectly, higher share and house prices therefore lead to an increase in consumption among all layers of the population.

Resilience means looking out for everyone

Part of the robust consumption can therefore be explained by further increased wealth inequality. That doesn't seem like a good definition of economic resilience to me. A truly resilient economic system protects the weakest in difficult times. Increasing inequality, on the other hand, is a recipe for further polarization, which undermines longer-term resilience.