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March 29, 2010

Emerging Focus: Rising middle class in emerging markets

by the Countries and Consumers team.

A new middle class is developing in emerging market economies as significant proportions of the population rise up from poverty in line with rapid economic growth. The expansion of this middle class not only provides competition for labour and resources, but also enormous potential for global consumer markets.

As a result, there will be a gradual shift in the dominance of global consumer markets from advanced economies to emerging market economies.

Key points

  • The World Bank estimates that the global middle class is likely to grow from 430 million in 2000 to 1.2 billion in 2030, defining the middle class as earners making US$10-20 a day (a range of average incomes between Brazil and Italy). China and India will account for two-thirds of the expansion;
  • While there is no universal definition for what constitutes the middle class due to varying income levels between advanced and emerging market economies (EMEs), but also within advanced emerging economies (Brazil, Poland, Mexico and Saudi Arabia) and secondary emerging economies (emerging Asia, Romania and Russia), growth in households with annual disposable incomes between US$5,000 and US$15,000 has been striking. Kazakhstan, Romania and Russia saw the fastest growth during 2000-2010 with over 50.0% of households in this category by 2010;
  • The share of emerging and developing economies in world GDP in purchasing power parity terms (PPP) is expected to overtake advanced economies by 2014, according to the IMF. China is forecast to be the biggest contributor to world GDP growth by 2017, overtaking the USA and accounting for 18.4% of world GDP in PPP terms from 7.1% in 2000. India, with a share of 6.2% of world GDP in PPP terms, will be the third largest contributor towards world GDP in 2017;
  • The rising middle class in EMEs is also a result of the rapid increase in populations within these economies. The workforce (population aged 15-64) for these economies together will rise to 3.0 billion in 2020 from 2.7 billion in 2010, accounting for 68.8% of their total population in 2020. The most rapid increase in the working-age population over 2010-2020 comes from Saudi Arabia (25.6%), followed by the Philippines (23.5%) and the UAE (21.6%);
  • The transition for the emerging middle class, however, is not devoid of challenges. Skills shortages are likely to become more apparent despite a new educated mass of people, while resources might become scarce. Income inequality is expected to rise mainly due to the widening difference in earnings potential between skilled and unskilled workers.

Biggest growth potential lies in emerging Asia

The biggest potential in terms of growth in the middle class lies in emerging Asia. Most emerging market economies are experiencing rapid economic growth with a significant proportion of the population rising from a low income base:

  • As global drivers of world economic output and the most populous states in the world, China, India as well as Indonesia hold the biggest potential. The increase in the educated population is a key component leading to strong average incomes. In 2010, households with annual disposable incomes of US$5,000-15,000 as a percentage of total households is expected to be 31.7% in China, 14.6% in India and 35.7% in Indonesia. This will reach 46.2% in China, 41.1% in India and 58.3% in Indonesia in 2020;
  • In 2010, 65.1% of Kazakh, 68.2% of Romanian and 52.6% of Russian households are expected to have an annual disposable income of US$5,000-15,000. However, the proportion of households in this income band will decline to 5.2%, 3.8% and 7.8% respectively by 2020 as households move to higher income bands;
  • The potential for growth in the middle class in emerging Asia also stems from the increase in the number of households with annual disposable income of US$5,000-15,000. The total number of households in this income band for EMEs is expected to reach 331 million in 2010 from 104 million in 2000, of which emerging Asia accounted for 62.2% of households compared to only 32.8% in 2000. This will further rise to 79.6% by 2020 with China and India accounting for 306 million of the 488 million households within the income band.

Growing opportunities for global consumer markets

The rising middle class of emerging market economies presents immense opportunities for global consumer markets. This new middle class will have discretionary income to buy higher-end consumer goods, better healthcare and to spend on education:

  • The average per capita consumer expenditure in EMEs is expected to reach US$6,490 in constant terms (2009 fixed exchange rates) by 2020 (from an estimated US$4,381 in 2010). These levels are still low compared to advanced economies with per capita consumer expenditure averaging US$28,067 in G7 economies by 2020. In 2010, China, India, Vietnam and Egypt will see the highest annual increase in per capita consumer expenditure in the EMEs in real terms rising by 8.6%, 7.1%, 5.7% and 5.5% respectively;
  • The new middle class is keen to consume. Vietnam's, India's and Philippines' consumer markets are fuelled by young professionals who spend on electronic goods, communications and transportation. By 2020, the population aged 0-29 will constitute 53.3% and 56.9% of the total population respectively in India and Philippines compared to 34.2% and 33.1% of the total population in Russia and China;
  • Over 2010-2020, the population aged between 0-29 will decline in some countries like Brazil, China and Vietnam. Nonetheless, its proportion to total population remains significantly higher than most advanced economies. The consequence of Beijing's one-child policy combined with the population's strong preference for male heirs has created a gender imbalance and is leading to a rapidly ageing population in China. While declining birth rates and high mortality related to unhealthy lifestyles and poor healthcare are causing Russia's population to shrink, extensive emigration has produced a demographic crisis in Ukraine;
  • Poverty levels are declining in developing economies creating a new market for consumer goods and services. According to World Bank estimates, the percentage of the global population living on less than US$2.0 per day will drop to 29.8% by 2020 from 47.0% in 2005.

Growth index of population aged 0-29 in selected economies: 2010 – 2020

Challenges beyond potential

  • Strong growth in middle class incomes is adding to the problem of income inequality in many EMEs with terms like 'upper middle class' and 'lower middle class' increasingly used. Income inequality measured by the Gini Index (an index between 0-100 with 0 indicating most equality and 100 indicates total inequality) has risen most in China, Indonesia, Malaysia and India between 2000 and 2010. In China, it will reach 51.3 in 2010 from 40.2 in 2000;
  • By 2020, the urban population in these economies will reach 53.1% of the total population compared to 48.7% in 2010. The most significant growth in urban populations will be in Indonesia, China and India rising to 62.5%, 52.7% and 34.1% of the total population in 2020 from 53.5%, 47.2% and 30.1% respectively in 2010. However, the growing demand from urban consumers is likely to exert pressure on existing resources and could lead to spiralling inflation;
  • Middle class earners in EMEs are savers by nature despite growing levels of annual disposable income. The savings ratio as a percentage of disposable income is expected to remain high in most EMEs with the highest rate of 54.8% in Saudi Arabia in 2010. During the same year, in China, India and the UAE it will reach 26.0-38.0% of disposable income compared to 8.0% in the USA.

Prospects

Emerging Asia's middle class will be one of the fastest growing populations in the world and the biggest market for consumer goods and services:

  • Euromonitor International forecasts that China, India and Indonesia are expected to be the best performing emerging economies in 2020 with annual real GDP projected to grow by 8.8%, 7.1% and 7.0% respectively;
  • EMEs are projected to be the largest contributor towards population growth between 2010 and 2020. There will be growing demand for basic products and a consequent increase in consumer spending. Consumer spending in EMEs is forecast to grow by an annual average rate of 10.4% between 2010-2020 in US$ terms with China, India, Brazil and Russia being the largest consumer markets within EMEs in terms of total spending;
  • By 2020, the total income of households with a disposable income of US$5,000-15,000 in emerging Asia will account for 4.9% of global annual disposable income from 0.8% in 2000. Consumer demand in EMEs will gradually move from basic needs to more sophisticated demand patterns and will be the key driver of global consumer markets.

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