CSCMP's Supply Chain Quarterly
October 22, 2018
Monetary Matters
Monetary Matters

Emerging consumer markets: the new drivers of global economic growth

Consumption is still largely concentrated in North America and Western Europe, but consumers in emerging markets are stepping onto the world stage in greater numbers.

The American consumer is no longer the primary driver of world economic growth, a fact that holds profound implications for international trade patterns and supply chain dynamics.

For now, consumption is still largely concentrated in North America and Western Europe, but consumers in emerging markets are stepping onto the world stage in greater numbers. These new consumers are making a noticeable impression on multinational corporations, which view them as "low-hanging fruit" compared to their fatigued and frugal counterparts in the developed countries. Indeed, retailers increasingly view the sluggish U.S. and Western European consumer markets as a battleground for market share, whereas they see emerging markets, with their rapidly growing consumer demand, as a more attractive opportunity for growth.

Article Figures
[Figure 1] Domestic consumption to world GDP (percent)
[Figure 1] Domestic consumption to world GDP (percent) Enlarge this image
[Figure 2] Foreign trade to domestic GDP (percent)
[Figure 2] Foreign trade to domestic GDP (percent) Enlarge this image

BRIC consumption accelerates
The U.S. consumer may still reign supreme in total and per-capita spending, but growth in the U.S. gross domestic product (GDP) and consumer spending is being eclipsed by that of emerging markets, most notably Brazil, Russia, India, and China (the so-called "BRIC" countries). Since 2007, in fact, the global economy has entered a transitional phase in which Chinese and Indian consumers are exerting increasing influence on international trade.

Consider that since the end of the "Great Recession" in June 2009, U.S. consumer spending growth adjusted for inflation has averaged 2.2 percent. Meanwhile, consumer spending growth adjusted for inflation in India and China has exceeded 7 percent each year since 2006.

Figure 1 illustrates this shift in consumption to emerging markets. U.S. consumption as a percentage of world GDP peaked at approximately 22 percent in 2002, and it has steadily declined since then. Consumer spending in Western Europe reached almost 18 percent of world GDP in 2004 and has since fallen at roughly the same pace.

This trend is expected to continue. IHS Global Insight's Global Scenario and Global Consumer Markets econometric models predict that by 2015, U.S. and Western European consumer spending combined will account for only 26 percent of world GDP, down considerably from a 38.5-percent share in 2002. Compare this to the BRIC countries' consumer spending: after averaging 4.4 percent from 1995–2005, it accounted for 8.1 percent of world GDP in 2010 and is projected to reach nearly 12 percent by 2015.

Demographics, economics drive change
While the Great Recession, the current European debt debacle, and anemic growth in both Europe and the United States may have exacerbated this shift toward emerging market consumption, there are strong, underlying demographic and economic forces driving it.

For example, consumer spending represents approximately 70 percent of the United States' gross domestic product, while Western European consumers account for slightly less than 60 percent of that region's GDP. The developing world is less consistent. China's consumption- to-GDP ratio is low, at 36 percent, but India's is one of the highest in the world—on par with that of Western Europe.

Foreign trade (imports plus exports) has been playing a smaller role in the BRIC countries than in Western Europe and the United States, where governments are trying to promote export growth to enhance their economic outlook in the face of weakening domestic consumer demand. Figure 2 illustrates the growing importance of trade to Western economies even as BRIC's ratio of foreign trade to domestic GDP declines.

In the past, the developed economies maintained their high levels of consumer spending by increasing debt and saving less to spur economic growth. But now some emerging nations want consumption to play a greater role in their economies, too. For instance, the Indian government is trying to stimulate consumption by attempting to open up its domestic market to foreign multibrand retail stores. Another example occurred during the last National People's Congress of China, when Beijing made it very clear that one of its top priorities is to have domestic consumption play a stronger role in China's economy, rather than continue to heavily rely on exports and investment to generate growth.

(This reflects the prevailing global imbalance in which the United States, functioning as the de facto reservecurrency nation, is able to accumulate negative fiscal and trade imbalances while China and other emerging nations essentially "fund" those imbalances via their export markets and the purchase of U.S. debt.)

Moreover, there still are profound differences between the consumption patterns of the developed world versus those of the emerging markets. Spending on food, for example, represents a much larger percentage of outlays in less-developed economies than it does in the United States.

However, the rise of the middle class in China, India, and Brazil is having a clear impact on consumption patterns, providing more opportunities for consumer-oriented multinational corporations to increase their revenues and profitability. As more Chinese and Indian families enter the ranks of the upper-middle class, status-related spending behavior may become more widespread and could further alter the composition of global consumer markets.

This phenomenon was described by the American sociologist-economist Thorstein Veblen in his classic book Theory of the Leisure Class: An Economic Study of Institutions. Veblen demonstrated that once people have achieved a certain level of wealth and availability of leisure time, they want to make an impression by showing their newfound status through conspicuous consumption and leisure activities (a principle known as the "Veblen Effect"). This is readily apparent in China and India today, where buying that first air conditioner, car, or elegant Italian purse has a functional purpose but also provides a social signal that the consumer is a member of the nouveau riche.

Innovation looks eastward
Major U.S. corporations are taking notice of this global rebalancing. In his book Spin-Free Economics, IHS Chief Economist Nariman Behravesh writes, "Most multinational corporations consider the Chinese market—especially the booming middle class—to be a centerpiece of their growth strategies over the next couple of decades." But China is not the only place to look for growth. "In some ways, [India] offers even more promising opportunities than China," Behravesh notes.

Evidence of emerging markets' growing importance to multinationals abounds. Dell, for instance, recently launched its ultra-thin XPS 14Z laptop in China, now the largest market for personal computers, one month before it introduced that model in the United States.

Some American automobile manufacturers have been launching new models in Asia, and others, such as Buick and Chevrolet, are planning to do so in the near future. Even Hollywood has responded to this rebalancing of global consumer spending by releasing several American films in Asian markets prior to their U.S. release.

These changing dynamics on the world economic stage will have domestic implications for Western economies. Not so long ago, new product ideas and designs were created in the developed world, produced in emerging markets, and then marketed primarily in the developed markets. But a new paradigm has emerged. Now, the East is often getting "first dibs" on many Western innovations.

Chris G. Christopher, Jr., is executive director of the U.S. Macro and Global Economics practice at the research and analysis firm IHS Markit. Erik Johnson covers consumer markets and housing indicators and produces the optimistic scenario of the IHS Global Insight quarterly U.S. macroeconomic forecasting model. He received his undergraduate degree in economics from Colby College.

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