International | Sep 21 2009
By Andrew Nelson
Income growth around the world is accelerating, but nowhere is it happening faster and having a greater impact on the world economy than in developing regions. This push into the global middle class is creating huge numbers of new consumers and the bulk of them are coming from China, South Asia and India.
According to World Bank projections, the number of middle income consumers will increase by over by over 600 million between 2005 and 2015 and half of these new consumers will be in China, South Asia and India. Currently, this mid-market segment represents a $12.5trn market of the global economy, according to the World Resources Institute and the International Finance Corporation. New research from Citigroup estimates that the purchasing power growth from this increase will be around 50%.
All up, the World Bank forecasts predict that the number of middle income consumers will increase by over 800 million between 2000 and 2030, with developing countries accounting for 93% of the global middle class in 2030. This is up from 56% in 2000. Citi estimates that as income levels in China, South Asia and India increase, spending patterns will change dramatically. Currently, the bulk of consumers in these countries are focused on basic food and clothing, but this will increasingly shift to other goods and services over the next 15 years.
This trend is already well under way. Citi notes that in 2008, China’s retail sales surged 16.8% to US$1.2tr, which has now exceeded Japan to become the largest retail market in Asia for the second consecutive year. Yet it hasn’t been an easy road for China, as over the past 20 years household consumption-GDP ratio has actually declined at a steady rate. However, Citi notes this decline was the result of imbalanced growth that drove investment and exports at the expense of consumption.
Since the 1997/98 Asian financial crisis, the county has introduced numerous initiatives aimed at ensuring sustainable growth, with the main thrust being a concerted push towards boosting domestic consumption in order to achieve more sustainable growth. In the early stages of China’s economic growth, more income meant more spending on food and clothing, which accounted for about two-thirds of total household spending. But lately, this share is shrinking significantly. The sectors that are benefiting from increased expenditures in the past decade are mostly service-oriented, particularly healthcare, education, transportation, and communications.
Citi thinks that as long as the consumption-GDP ratio stabilizes in China’s key coastal areas, representing about 59% of total GDP in 2007, the rise and rise of China’s consumer economy is almost a certainty.
In India, consumption accounts for 66% of headline GDP and the private sector share is 55%. While China has cooled over the last decade and is only now picking back up, India has been a story of steady growth in consumption, which has increased by 5-7% every year over the last ten. Demographics are improving, retail credit is increasing and incomes are rising, especially for the growing middle class. Of course the country is admittedly improving off a very low base.
However, the traditionally very poor rural segment of the population is also experiencing rising incomes, with companies increasingly building supply chains directly with farmers. So with both urban and rural conditions improving, Citi thinks the prospects for consumption growth in India “remain bright”.
Of these factors, the shift in demographics is the most important driver of India’s recent economic boom. An ever increasing number of English-speaking workers has helped to fuel an offshoring and service-sector boom. And with Citi noting that 32% of the population is below the age of 15, the Indian labour force should continue to not only grow, but increase in quality. This, in turn, will contribute to growing urbanization and shifting consumption habits.
With economic growth now steady, income growth will also accelerate. This will lift increasing millions of people out of poverty and into this quickly modernising workforce, creating a bigger middle class. Citi believes the combination of poverty reduction and favourable demographics will see the Indian middle class rise from 5% of the population currently to 41% by 2025. Making it a huge consumption driver.
So what we’re waiting for now is the recovery in the region to kick in. And there are sure signs that this is happening well ahead and without the aid of the US and Europe. With Asia improving on its own, showing clear signs of less dependence on its exports to the rich West, we are seeing even more proof of the current, let alone future, importance of the Asian consumer.
More good news is that DBS Bank indicates that output is now actually higher than pre-GFC levels in both China and India. And while the bank notes that conventional wisdom would have us believe that the US consumption drives global growth, it is no longer of this opinion. DBS admits that while this view is slowly changing, it points out this former outmoded belief is being replaced by just as an erroneous of a prediction for slow Asian growth over the next 5-10. The new view, which is directly linked to the old would have us believe that Asia will soon need to idle as the West catches up. But DBS disagrees with this new belief as well.
DBS too points out that Asia is generating more and more growth on its own and this is coming from increasing consumer demand. RBS points out that growth in demand is the very stuff that global growth is measured by and right now, Asia generates as much as the US. Back in the 90’s, when current conventional wisdom was formed, Asia generated only half.
So not only will Asia’s emergence as the main driver of global growth drive ever increasing growth in that region in the next 5-10 years, it will actually help correct the imbalances that the above mentioned conventional wisdom thinks will keep Asian growth stifled during this recovery period.
As such, the bank doesn’t buy into the W-shaped recovery story for Asia and the world. It rather sees the current V-shaped recovery continuing. We are already on the way back up from the bottom thanks to Asia, and increasing input from Asia will be the main factor keeping global growth from another dip before the “real recovery”.
It’s only common sense, thinks the bank, as if we admit the US and Europe will experience slow growth in the years ahead (which is the current consensus) and if we acknowledge that Asia is already going strongly (which the bank thinks is the case), and if we finally accept the fact that ever increasing amounts of capital are re-entering the market, then it is only sensible to believe that these funds will go where the best growth is: Asia.