Growing middle-class leading consumption drive in rapid-growth markets
- Window of opportunity for RGMs to press ahead with economic reforms before liquidity is gradually withdrawn
- Growth forecast to be close to 5% this year and above in 2015
- Renewed capital flight could reduce growth to 3% in 2015
- Number of middle-class RGM households to double in the next decade
London,4 February 2014: Across the rapid-growth markets there will be nearly 200 million middle-class households by 2022 up from 94 million in 2012, according to EY’s latest Rapid-growth markets forecast (RGMF) out today. With the growing middle class buying a wider range of consumer products and services rapid-growth markets (RGMs) will increasingly look to their own markets to drive demand. Over the medium-term, RGMs still hold many winning cards.
As the number of middle class households increases, demand for health and education services is likely to expand significantly, also adding to the skills of the workforce. Spending on services such as communications, culture and recreation will grow at almost twice the pace of spending on food.
As a whole, RGMs are set to recover over the course of this year with 4.7% growth expected for 2014 and over 5% in 2015 but the risk of capital flight and a sharp slowdown has increased. According to the forecast renewed capital flight could lead to RGM growth falling closer to 3% by 2015, with global repercussions.
While growth is expected to remain steady, over the course of the next two years, more divergences are expected in terms of growth among the RGMs. Those in the Americas are struggling to regain momentum, while steady growth in China boosts Asia’s RGMs. With industrial production surprisingly strong in Poland and the Czech Republic, emerging Europe is gaining strength, looking to the West, particularly as Germany leads the Eurozone out of recession.
Rajiv Memani, EY’s Chair of the Emerging Markets Committee comments, “Rapid-growth markets have a window of opportunity to press ahead with key economic reforms and build on the momentum before the liquidity driven by surplus cash flows from mature economies begins to become scarce. We are likely to see more divergences between countries that are able to implement reforms and those that struggle to do so and suffer the consequences of a capital flight. The outcome of political processes like elections in a number of these countries and ability to keep government spending in check will decide the winners in the short-term.”
Growing RGM middle-class changing pattern of world consumption
According to the forecast, there are some dramatic trends in the spending power across some of the major RGMs. In China, the number of households earning over US$35,000 in real terms will triple to almost 80 million by 2022. China will have more households with this earning power in 2022 than Japan.
The transformation is most dramatic in China, but there will be shifts across all the RGMs. By 2022, there will be more than 15 million households in Brazil and Russia with this income level, while Mexico, Turkey and India will each have in excess of 10 million such households.
In Nigeria, the number of households earning more than US$10,000 will nearly double from 6 million in 2012 to just over 11 million in 2022. But what these households want may be very different from the consumer demands seen in previous periods of rapid economic development. For example, in China the pace of economic change and concerns over food safety and air quality has prompted a move toward defining a more sustainable consumption path. Businesses will need to tailor the products they offer to shifting local demands.
Increasing demand for culture and communications
Penetration of consumer durable goods is still relatively low in many rapid-growth economies. However, once household incomes approach US$10,000, demand for these goods picks up. Ten years ago, 28% of households in Thailand earned more than US$10,000 in real terms and now almost 40% do. Refrigerator sales have doubled in this period. Last year in Indonesia, 40% of households earned more than US$10,000. By 2022 this share will have risen to 60%, as a result of favorable demographic trends and urbanization.
The forecast shows that over the next 10 years spending on discretionary items will grow at a faster pace than spending on essentials.
To really capture the gains from this rising middle class and balance the pressures on scarce resources, many RGMs will need to invest in green technologies and public transport, and improve the business and regulatory environment.
While there is weaker outlook for financial and business services, with growth of approximately 4% this year and 5% for manufacturing and utilities, the growth for construction and distribution is expected to be more robust at 6% next year. This is in keeping with the trends for more urbanization and greater demand for retail and other consumer services.
Risks to the forecast
As jitters return to financial markets, some RGMs such as Turkey, Argentina and India are still vulnerable to capital outflows and runs on their currencies. Risks in Ghana and the Czech Republic have also increased, according to the RGMF heatmap.
Heightened political risks or weak economic growth could trigger a wave of risk aversion, leading to changes in portfolio allocations away from rapid-growth markets’ assets. This could lead to capital flight which would impact countries such as Turkey and India that are dependent on portfolio flows to fund their current account deficit. In this capital flight scenario, higher inflation, interest rates and debt payments would amplify the downturn. Along with falls in share and house prices, this would lower potential growth across most RGMs.
In this scenario, GDP growth in rapid-growth markets would fall to 3.7% and 2.8% in 2014 and 2015 respectively. This would in turn have a significant impact on growth in the advanced economies.
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