Asia economy: Consumers to the rescue?
The Economist Intelligence Unit: Asia's consumers are demanding and difficult to please. But they are getting richer, and they might help to save the world from a protracted recession, as well as bring about a long-overdue economic rebalancing. For Western multinationals, Asian consumer markets offer exciting growth opportunities. Despite the challenges of reaching Asian consumers and appealing to local tastes, these markets now look all the more attractive given the gloomy economic prospects in most of the rich world.
For decades Asia has acted as a workshop for the world, manufacturing goods sold to consumers in the West. This relationship provided the basis for the export-led development model of Japan, the East Asian "Tiger" economies and, more recently, China. But the 2008-09 global financial crisis has severely eroded the wealth of many Western consumers, many of whom have responded by reining in their spending. With deleveraging in the West set to continue for several years, the conventional export-led growth model utilised by Asian economies in the past is unlikely to be sustained.
But Asian economies have generally come through the crisis well. Although many suffered recessions in 2008-09 as a result of their external trade dependency, domestic demand held up surprisingly well, helped by policies that ranged from aggressive interest-rate cuts to fiscal stimulus packages. Moreover, there are signs that demand from consumers in the region is beginning to compensate for the declining prospects in Western markets. If this continues, these consumers could play an important role in putting the global economy back on its feet.
One of the expected drivers of consumption in Asia is the fact that a large number of people are on the cusp of entering the middle class. The middle class can be defined in a number of ways, but for the purposes of analysing spending it is best to think of it in terms of people who have reached a level of income that allows them to spend money on non-essential items. A study published in 2010 by the Asian Development Bank (ADB), entitled Asia's Middle Class: Past, Present and Future, defines the middle class as those people who are able to spend US$2.20 a day. The study estimated that Asia will account for 55% of the world's middle class by 2030, up from 25% in 2010.
A separate study published by the OECD in 2010 used the higher standard of expenditure of US$10-100 per day to define the middle class. It estimated that by 2030 Asia would account for 66% of the world's middle class (using GDP growth assumptions that were more favourable to Asia than those of the ADB), up from 28% in 2009. Estimates may vary, but the general story is same: a lot more Asians will become viable consumers in the next two decades.
A story of China and India
China and India represent the core of Asia's consumer story. In 2010 only US consumers spent more in total than those in China, and by 2013 the Economist Intelligence Unit expects China to overtake the US as the world's largest retail market. Already China is the biggest market globally for many household products, including televisions, refrigerators and airconditioners. It is also already the largest market for mobile phones, with around seven mobile-phone subscribers out of every ten people.
The rise in consumer spending in the coming decades will be part of a rebalancing act that China must perform in order to move its economic model away from reliance on net exports and investment and towards private consumption. Private consumption accounted for only 34% of Chinese GDP in 2010, whereas fixed capital investment accounted for around 46%—an almost unprecedented share, even in the development histories of the Asian Tiger economies, which followed similar models. The Chinese government has recognised the importance of rebalancing, and in the longer term consumer spending will be encouraged by the provision of better social security nets and the development of more comprehensive insurance markets.
In some ways India's retail market may be an even more exciting prospect than China's. It is currently the fourth-largest in the world, but we expect India's economy to grow faster than China's over the next few decades. Aside from the fact that India starts from a much lower base, with consequent greater potential for catch-up growth, demographics are very much in its favour. For all China's promise, its one-child policy has meant that the country faces high dependency ratios, caused primarily by population ageing, at an early stage in its development. By 2013 China's labour force will be shrinking, which could mean fewer—if wealthier—earning consumers. By contrast, India's working-age population is expected to continue growing for at least another 30 years and its dependency ratio will continue to fall for the next two decades. This demographic dividend should support economic growth and, in particular, domestic consumption spending. Moreover, India is not only attractive to firms selling basic goods to the millions who are escaping poverty. There are now over 150,000 US dollar millionaires in India, and this growing affluent class has shrugged off any traditional qualms about displays of wealth.
The broader implications
Increased Asian spending will help to support the recovery of the world economy in the next few years. It will also assist in addressing the global economic imbalances that were arguably a contributory factor in the international financial crisis of 2008-09. The large current-account surpluses that have been run by China, among others, have resulted in a glut of savings in Asia. This money has been recycled, in large part, via investments in Western securities, including government bonds, thus helping to keep interest rates low in industrialised countries. This in turn enabled many governments to take advantage of low borrowing costs and run large budget deficits. US households also borrowed heavily at these low interest rates, largely in the form of mortgage loans. Eager for decent returns, banks lowered their lending standards, fuelling what eventually became the sub-prime crisis.
A more balanced world economy, based on greater spending in Asia rather than cheap finance for the West, would represent a far more sustainable model for growth and would also help to quell fears about rising tensions related to global trade imbalances and exchange-rate misalignments. By 2015 we expect considerable progress to have been made in reducing the imbalances. The appreciation of the Chinese renminbi and other Asian currencies will play a role in this, but greater spending in Asia will also be important to rebalancing.
Stronger consumption growth will also alter trade dynamics within Asia. Intra-Asian trade tripled in 2000-09, whereas global trade and trade between Asia and other regions merely doubled. But despite this rapid growth, two-thirds of final demand for Asian exports still came from outside the region in 2009. The boom in intra-regional trade has overwhelmingly reflected a dispersal of supply chains, based on a model in which China plays the role of assembler of parts manufactured all across Asia (rather than one where it captures most of the value-added). We expect this to change during the next few years, with Asian exporters relying on fellow Asians for an ever-increasing proportion of their final demand. One implication of this is that the region's economies should become more resilient against negative shocks from the West.
Our core scenario is therefore one in which increasing wealth and spending in Asia supports global economic recovery and stability. But there are risks to this forecast. There is no guarantee that China will shift gears smoothly and change to a more balanced and sustainable growth model. The transition from a model based on growth in China's net exports and investment towards greater reliance on its own consumers will be fraught with dangers, and this, coupled with the country's non-democratic political system, harbours the potential for a hard landing. Equally, India's demographic dividend is not a cheque waiting to be cashed. Poor policy decisions, or even policy paralysis, could turn the country's youthful population into a problem rather than a blessing if sufficient jobs are not created.
The recent upheaval in the Middle East and North Africa has provided a stark reminder of what can happen if employment opportunities are not created for young and educated workers.
Even if growth continues uninterrupted, more Asian cars on the road and airconditioning units cooling middle-class homes will add to energy consumption in the region, posing challenges in terms of climate change and putting upward pressure on global energy prices. Nonetheless, Asian consumers represent a rare positive in what remains a bleak global outlook.
