Global Capital Markets

A new report by the McKinsey Global Institute highlights the impact of the global financial crisis on global capital flows.

The global financial crisis and worldwide recession abruptly halted nearly three decades of expansion for international capital markets. From 1980 through 2007, the world’s financial assets—including equities, private and public debt, and bank deposits—nearly quadrupled in size relative to global GDP. Global capital flows similarly surged.

But the upheaval in financial markets in late 2008 broke this trend. The total value of the world’s financial assets fell by $16 trillion last year, to $178 trillion, the largest setback on record. One of the most striking consequences of the financial crisis was a steep drop-off in cross-border capital flows, which include foreign direct investment (FDI), purchases and sales of foreign equities and debt securities, and cross-border lending and deposits. These capital flows fell 82 percent, to just $1.9 trillion, from $10.5 trillion in 2007. (A sharp drop in cross-border lending was the biggest reason capital flows dried up.) The trend appears to have continued in the first quarter of 2009, with global capital flows falling to an estimated $1.5 trillion on an annualized basis.