Middle class growth in emerging markets

The middle class effect and hitting the sweet spot of growth

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The idea of a growth “sweet spot” extends beyond a simple trigger-threshold of rapid consumer growth. For economists, this happens when people start leaving poverty and entering the middle class in their millions.

But for businesses, a more useful sweet spot occurs when significant numbers begin earning the equivalent of over US$10 per day, and enter our global middle class. At this point buying habits should attract the attention of companies used to supplying the developed world’s middle class markets.

The sweet spot also produces a “middle class effect”, where the size of the middle class is directly proportional to economic growth. Hitting the sweet-spot accelerates growth, which, in turn increases the middle class, producing a virtuous circle.

The economist Surjit Bhalla has claimed that every 10% increase in a nation’s middle class produces a 0.5% rise in its growth rate. For these reasons, the year a country hits its sweet spot — on average around US$6,000 per capita income — is key to assessing growth potentials.

When will the EM countries hit their sweet spots (projected)?

Country

Year

Egypt

2011

Indonesia

2015

India

2017

Philippines

2019

Vietnam

2019

Pakistan

2024

Nigeria

2025

Bangladesh

2029

Source: Economist Intelligence Unit (EIU).

Projecting economic growth is important, but companies hoping to tap EM middle class markets need more specific information. Different markets have different sweet spots; for instance, for the motor vehicle market this occurs between per capita income levels of US$5,000 and US$12,000, with a peak of around US$8,500.

China is a good example of this.

In 2001 its automobile market was tiny, with total annual sales of less than a million units. As per capita incomes increased, reaching US$6,000 in 2008, the market underwent massive expansion. In 2004, General Motors sold 1 car in China for every 10 in the US; by 2009 this reached parity.

In 2009 total automobile sales in China were over 10 million units.