Global Consumer Spending and A Rising Middle Class: Where Are We Going to?

Aad Weening, Director International Consumer Trends IORMA
London, 1 February 2017

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According to experts, global consumer expenditure is on the rise again. Growth can be estimated at 3% in real terms (around 4,2% in current prices), up from around 2,5% in 2015, largely on account of the economic recovery in key emerging markets.

Consumer spending is defined as what households buy to fulfill everyday needs. This private consumption includes (durable and non-durable) goods (between 30 and 40%) and services, like real estate and health care (between 60 and 70%).

Consumption is shifting toward services, reflecting two trends: heavy spending on health care among aging consumers in developed regions, and increasing spending by consumers in emerging economies as their incomes rise to thresholds where consumption of services such as communications, transport, restaurants, and catering takes off.

In the developed world consumer spending accounts for between 55 to 70% of total GDP, representing approximately 70 per cent of the United States’ GDP, while European Union consumers account for around 57 per cent of the EU’s GDP.  The developing world is less consistent. China’s consumption-to-GDP ratio for instance is low, at under 40 per cent, but at around 58%, India’s is on par with that of the European Union.

A number of demographic and economic determinants define consumer spending: rising incomes, growing consumer confidence, progressive urbanisation and better availability of goods will have a positive impact on consumer spending all over the globe.

Calculated in current USD, global GDP in the year 2000 was just under 35 billion of which the share of the advanced economies was 80% and for the emerging and developing countries 20%. Absulute leader was the USA with a 34% share, followed by Japan (2), China (3), Germany (4), France (5), the UK (6), Italy (7), Spain (8), Brazil (9) and Canada (10).

For 2016, total GDP is estimated at USD 75 billion,  of which the share of the advanced economies was around 60% and consequently for emerging and developing countries 40%.  Leader of the board is still the USA with a share of just under 25%, followed by China (2), Japan (3), Germany (4), UK (5), France (6), India (7), Italy (8), Brazil (9)- and Canada (10).

A changing global economy means that many developing nations are set to become much richer in the next years, up to 2030. While the US is set to remain the world’s largest economy by 2030, they won’t be as comfortable in their position. Currently, the USA’s GDP is almost double that of the second-largest economy – China.

According to projections, in 2030 China will be closely following with a “mere” $2 trillion lower. The fact they will have tripled their GDP by then suggests that they won’t be in second place for much longer.

In the top ten India is forecast to move into third place, using its massive labour force to steam past Western Europe, overtaking Germany, France and the UK. Of the BRIC countries Brazil will be ranked 6th and Russia 10th.

Spain and Italy will have fallen out of the top ten and newcomers in the top twenty will be Mexico, Indonesia, Turkey. Saudi Araboia and Nigeria.

A key source of demand in the global economy for the past 50 years have been middle class consumers in the US and other major developed countries. Even if there are disparities in estimates arising from differences in defining what exactly “middle class” is, future global demand growth is expected to come from the ever growing middle classes in emerging economies, especially in Asia.
In 2009 the middle class included 1.8 billion people, with Europe leading (664 million – 36%), already closely followed by Asia (525 million – 28%). Even in Africa, where middle class’s growth has not been very robust, it has nonetheless been noticeable and contributed to increased domestic consumption in many countries.

The size of the global middle class is forecast to increase to 3.2 billion by 2020. By that year, developing countries and emerging markets will be home to 80% of the world’s middle class. It is also forecasted that the middle class will have reached 4.9 billion by 2030, more than 50% of the expected world population of 8.5 billion by that year..

The bulk of this growth will come from Asia: by 2030 Asia will represent 66% of the global middle-class population and 59% of middle-class consumption, compared to 28% and 23%, respectively in 2009.

Yet, compared to prior years, emerging and developing economies are likely to enter an era of slower growth compared to recent years, yet they will outpace growth in developed and advanced economies. Over the period until 2020 the major advanced economies are expected to grow around 1.5 to 1.6 per cent, while emerging economies will grow 4.6 to 5.0 per cent according to the latest IMF World Economic Outlook.

At the same time, in developed economies, as the boost to consumer spending from low energy prices is fading, it is not always going to be easy to convince consumers to part with their cash.

Understanding how the global consumer markets will develop in 2017 and beyond is crucial for consumer goods companies to identify growth opportunities and win new consumers. Over the past years already we have seen a growing share of international crossborder sales as many companies, in the West as well as in the East, were becoming aware of the great opportunities out there and are either opening up their websites to international customers or exploring and accessing new international markets.

How will consumer spending in the advanced and emerging economies develop in the coming years up to 2030, taking into consideration on the one hand the top three major drivers: population growth, rapid urbanisation and rising incomes and on the other hand challenges including climate change as well as social and political changes, while instituting global policies that can maintain a liberal, open, and dynamic international order.

Even if we are aware that there still are quite some uncertainties arising from geopolitical factors, the coming elections in various European countries, the new USA administration, the Brexit negotiations  etc, etc. the following table contains some interesting data with respect to the changing relation between advanced and emerging economies as well as global consumer spending up to 2030:

 

2000

2016

2030

Global Population

6.1bn

7.5bn

8.5bn

Middle Class

1.0bn

2.5bn

4.9

Share in Global Population

16%

33%

58%

World GDP USD billion

34

75

150

Share Emerging Economies

20%

40%

50%

Global Consumer Expenditure

20

45

90

Share of Emerging Economies

20%

40%

50%

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