Asia to grab lion's share of global consumption by 2030

With its burgeoning middle class population, Asia is all set to capture a major share in global income and consumption by 2030.

China alone would account for more than one-quarter of all new consumption worldwide over the next 15 years, adding more than 10 percentage points to global consumer demand growth in the process, a recent research has said.

As per World Bank estimates, the middle class population of South and East Asia, that held about 2.1 per cent of global income in 2000, would contribute 7.7 per cent by 2030.

This rising share has also captured attention of observers towards the potential that Asia holds to take up the mantle from the US as the "world consumer of last resort".

Its middle class, being one of the fastest growing population groups in the world, would be a key ingredient towards that, even as it may take a while for it to happen, said researchers.

According to the Deutsche Bank (DB) research, there are two reasons for Asia's better prospects. One is faster population growth in South Asia indicating that the middle class in these countries are growing more quickly and the second is although the population in East Asia is growing more slowly than in other regions, its annual per capita income growth is much higher (almost twice that in Sub-Saharan Africa) so it will still increase its share of global income in that time-frame.

"The burgeoning Asia's middle class makes it an important consumer market, an engine of economic growth in the region, and an important global political force," said the report.

Asian economies would see a high increase in their private domestic consumption, with China reaching 8.3 per cent by 2020 and India 6.3 per cent by 2020.

Domestic consumption by Asian countries would fuel demand. On current trends, China's consumption would grow by more than eight per cent over the next 15 years making it the world's third-largest consumer by 2020, said a latest MGI research.

However, presently China under-consumes, given the size of its total economy, said MGI.

According to the research, private consumption in China today accounts for only a 36 per cent share of overall GDP – the lowest percentage of any major economy in the world, reflecting China's reliance thus far on a giant investment machine that crowds out consumption.


Dynamic middle class

Deutsche Bank analysts said that the emergence of a large and dynamic middle class raises Asia's profile as an attractive market destination. "It heralds a rise in earnings and disposable income," they said.

Studies demonstrate that as income increases, a smaller percentage of it is spent on necessities such as food and more is spent on optional items. Thus, it is evident that in comparison to lower-income households, the middle class has a greater amount of discretionary income to use and it will be more diversified in its consumption choices, said the researchers.

For essential purchases such as food, middle class consumers may tend to switch consumption to more expensive, better tasting foods or spend more time eating out. In addition, this demographic group will spend a larger percentage of their income on non-essential categories.

Quoting a study of 13 developing countries, including India and Indonesia, by Banerjee and Duflo (2008) about the middle class and consumption, DB said it was found that the share of expenditure devoted to entertainment went from virtually zero for the very poor to one to five per cent of total income for those in the next income group, which had per capita expenditure of $6-$8 (Dh22-Dh29) per day. This trend continued at different income levels.

Similar results can also be found for consumption on alcohol, healthcare, household goods and infrastructure. This can help explain the boom in consumer products such as televisions and mobile phones throughout Asia.

"As income levels continue to rise, the middle class not only diversifies its spending but also increasingly demands more quality and innovation in the goods that it purchases. This drives competition among suppliers and the opportunity to target goods to specific niches of consumers. Along with demand for traditional consumer products, the demand for a variety of financial services increases in many countries as the middle class expands."


Reliance on credit

DB analysts said many Asian nations had shown evidence of growing reliance on credit, especially in personal credit cards.

In countries such as Malaysia and Singapore, which already boast more than one credit card per person, this simply means additional or supplementary credit cards in a household, while in other places such as India this entails capturing first time users.

There is also evidence of increased lending for personal mortgages in some countries. India, according to the DB research, saw the amount of mortgage loans outstanding grow more than 25 per cent between 2006 and 2007 and exceeded 12 per cent between 2007 and 2008.

More sophisticated financial services, such as investment advice or trust and estates preparation, have generally been geared towards the high-net-worth segments of the population. "However, this trend is also shifting and these products are being increasingly marketed to the middle class populations in the region."

According to DB analysts, the middle class supports a more sustainable growth model.

They said that it would lead to a more sustainable growth by reducing inequalities in areas such as land and income.

"One way in which the middle class could lead to more sustainable growth is through the reduction of inequality. The link between inequality and growth can be controversial. Several studies have attempted to demonstrate that high levels of inequality – such as land inequality or income inequality [whether measured by the Gini coefficient or another measure such as quintiles] – is negatively correlated with economic growth."

DB said various researches had proved that reduction in inequalities could lead to a direct growth.

However, this growth segment has not stayed immune from the global crisis, said the analysts.

"Beyond the bridging effect of the middle class, it also contributes to growth directly by driving domestic demand. The current global recession and its effects on the Asian economies make it clear that the region has not 'decoupled' from dependence on external demand and exports. However, as the middle class grows and income levels climb, domestic demand for goods can also rise. Independently from the international cycle and thus contribute to economic growth."

In addition, the middle class's search for quality goods requires investment into production and marketing functions in the economy which then spreads the wealth. Parents in the middle class also tend to have fewer children and spend more on education and health for themselves and their children.

Although this may require more savings at the household level, it requires fewer social safety nets and subsidised assistance from the government. This then frees resources to be used for infrastructure and investing in the private sector.


China to boost consumption

China, which is among the fastest-growing economies in the world, is all set to capture a major share of global consumption and income. MGI said China has the potential to boost its consumption share of GDP from 36 per cent in 2005 to 45 to 50 per cent by 2025, six to 11 percentage points above trendline projections of 39 per cent.

The researchers said it would take a concerted and urgent effort on multiple fronts by both the public and private sectors to overcome the entrenched industrial model that has dominated China's economy in recent decades.

"The prize would be an economy that is less vulnerable to ill winds blowing in from overseas, higher levels of efficiency, 15 per cent higher average household incomes relative to trend, and a new economic maturity that will stand China in good stead in the long term," they said.

Taking a view of Asian economies, MGI said Japan's consumption share stands at 55 per cent and South Korea's at 48 per cent. The shares in two relatively consumption-heavy Western economies – the United States and the United Kingdom – are 71 per cent and 67 per cent, respectively.

"While there is no optimal level for the share of consumption in an economy – some observers might argue that a consumption share of around 70 per cent is as unbalanced as China's 36 per cent – a share closer to 50 per cent would bring China in line with its peers in Asia today."

On a per capita basis, this would translate into consumption that is 26 per cent to 50 per cent than forecasts based on current trends, said MGI.

"From a global perspective, China's share of world consumption would increase to between 11 per cent and 13 per cent in 2025, up from 8.9 per cent that we project on current economic trends. This would, in turn, mean that China would account for more than 25 percent of consumption growth worldwide over the next 15 years, up from 18 per cent on trend," said MGI.

The analysts said in case of China, if the consumption share rises from today's 36 per cent to between 45 per cent and 50 per cent of GDP by 2025, the country would generate an additional eight per cent to 15 per cent of annual GDP, compared with trendline projections.

The analysts said the composition of the economy would show a marked shift. For instance, government spending would be nine per cent to 19 per cent higher due to increased healthcare provision and to the institution of investment and education subsidies. China's trade surplus could narrow by up to 40 per cent. China would create between 10 million and 50 million more jobs than projected on current trends, mostly in the service industry, and boost average household incomes by 10 per cent to 20 per cent as its industry sector transitioned to higher value-added manufacturing.

From rest of the world's perspective, China would become an even more relevant and vital player in the global economy, said the research.

"China's share of world consumption would increase to between 11 per cent and 13 per cent in 2025, up from nine per cent that we project on current trends and unchanged policies."

According to the research, China needed to pursue long-term measures if it is to boost its consumption share.


Stimulus plans

DB researchers said the middle class income group was not immune from the crisis and measures needed to be taken to ensure that the adverse impacts were reduced by focusing on improvement of areas such as human capital.

The analysts said they expected the global economic and financial crisis to impact emerging Asian economies via job losses, reductions in household financial wealth and potentially higher taxes in order to finance announced stimulus plans. However, the impact of the crisis elsewhere will be much larger than for Asia's middle class.

Explaining the challenges that the middle class population in the Asian economies stood exposed to, the analysts said: "Expansion of the Asian middle class could be in peril if the region entered a period of prolonged recession or very weak economic growth. The medium- to long-term development will be closely tied to the country-specific patterns of demographic changes."

DB said that planned reforms of social security and education systems play an important role as well.

"In Asia, low-skilled workers were affected first by the crisis as manufacturing and construction sectors slumped. Service sectors such as trade-related and financial services, as well as real estate and logistics, have been deeply affected by the crisis. The same holds for research-intensive industries like information and telecommunication, as well as services outsourcing."

In Hong Kong and Singapore, demand for highly skilled personnel has been decreasing rapidly since mid-2008 and in addition to private sector job cuts, there is evidence that the public sector is also cutting jobs.

"Even if unemployment rates for the middle class do not go up as rapidly as for blue-collar workers, wage growth will remain subdued in 2009-10, putting pressure on disposable income growth.

"Compared to other emerging markets, non-Japan Asia is expected to post higher growth rates as structural growth drivers such as demographics, education, openness etc support the medium- to long-term growth outlook. While this should in general also support the growth of the region's middle class its expansion may be jeopardised if the global crisis leads to permanent cuts in education and healthcare expenditure.

In the more developed economies in non-Japan Asia, like for instance Singapore and Taiwan, there are signs of widening income gaps. It is difficult to clearly identify the reasons for this development – explanations range from globalisation to technological progress. A look at experiences in industrial countries can be illustrative since some of the observed trends are similar, such as declining real incomes or increasing income stratification.


Household wealth

Studies for the US show that over the past few years household wealth gains have mainly accrued to the wealthiest 20 per cent of the population. Indebtedness of the middle class has drastically increased, while real incomes of middle class families have declined by almost three per cent on average between 2000 and 2005. At the same time, expenses for health insurance and education have risen in real terms, putting additional pressure on the middle class. Similar findings apply to Germany, where the population shares of the middle class has declined markedly, dropping to 54 per cent in 2007 from 62 per cent in 2000.

Furthermore, the stratification of income has changed, with the average income earners suffering "the most severe losses". As a period of relatively weak growth coincided with labour market reforms. Asian governments can draw conclusions from these experiences. Their focus should be on continued improvements in education, well-targeted public services provision and cash transfers, especially to those members at the lower edge of the middle class.

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