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May 31, 2012

Special Report: Rebalancing Economic Power to Emerging Markets

AsiaEmerging market economies have been the main drivers of global growth since the financial crisis of 2007/2008. A combination of rising middle classes, increasing real incomes, plentiful credit and growing populations have made emerging economies some of the most important consumer markets in the world. However, above-average inflation and falling demand from their developed export partners are threatening future growth prospects.

Key Points

  • Emerging market economies have been the main drivers of global economic growth over the last decade and this growth is set to continue through the next decade. Click to tweet! Between 2000 and 2012 real GDP from emerging market economies will have grown by a forecast average of 105% while the real output of developed economies will have grown by just 20.2%; Click to tweet!
  • Between 2007 and 2011 imports to emerging markets increased by 53.2% in US$ terms, while exports from the region grew by 49.0%. Click to tweet! As a consumer market, these countries are only going to become more important over the next decade given their sheer size and the rate at which real incomes are growing;
  • Annual gross income per capita in developing economies increased by 26.5% in real terms between 2006 and 2011 and this figure is set to increase by a further 42.4% between 2012 and 2020; Click to tweet!
  • High inflation will remain a threat to emerging market economies. Rising prices may ease somewhat as commodity prices fall later in 2012 but in most countries inflation will remain above normal, with an average inflation figure of 4.5% in 2012 across all developing economies;
  • Population growth in emerging market economies is going through a phase of exponential growth. Between 2006 and 2020 the combined population growth of the world's developing economies is forecast to be 18.3% while developed economies will see 6.6% growth over the same period. By 2020 emerging economies will account for 86.1% of the global population. Click to tweet!

Emerging Market Economies, Real GDP Growth vs. Total Population: 2006-2020

ScreenHunter_02 May. 31 10.00

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), World Economic Outlook (WEO)

Note: Figures for 2012-2020 are forecasts.

Catching up with developed economies

As output in emerging markets converges with their developed counterparts, global growth is being driven forward despite the downward pressure from western, developed economies. The global financial crisis of 2007/2008 exposed the flaws behind the economic theory which developed economies used to create their wealth. The levels of debt, both public and private, in developed economies have led to a trend of deleveraging which has driven down private consumption and wider government spending. Emerging economies have nowhere near these levels of debt and as such have room to grow, without the same pressure of debt servicing.

  • According to Euromonitor International, 2012 will be the year when emerging market economies surpass developed economies in terms of GDP measured at purchasing power parity (PPP). In 2011, GDP at PPP in emerging market economies was worth 49.2% of global GDP at PPP, while in 2012 they will be worth 50.8% and by 2020 they are forecast to be worth 58.1% of global GDP at PPP. This demonstrates the rebalancing we are seeing, whereby output in developing economies are making considerable strides towards reaching its potential; Click to tweet!
  • Libya is forecast to be the fastest growing economy in the world in 2012 with 76.3% real GDP growth, followed by Sierra Leone at 35.9%. Click to tweet! Libya suffered a seismic contraction in 2011 due to the upheaval leading up to the death of Muammar Gaddafi, while the resurgence of the mining industry in Sierra Leone explains the high level of growth here;
  • The fastest growing region in 2012 will be Asia Pacific with 5.9% real GDP growth which is set to increase in 2013 to 6.5%, thanks to continuing growth in the manufacturing and services sectors as well as more open capital markets in China; Click to tweet!
  • Positive growth rates are important but it's worth bearing in mind that growing too fast can put upward pressure on inflation and this is a danger that many of the more mature emerging economies are now facing. In 2011, inflation stood at 52.3% in Belarus due to the devaluation of the Belarusian ruble while India was 8.9% and Russia was 8.5%. Inflationary pressures are set to ease slightly over the course of 2012 as commodity prices fall but above average inflation figures will still prevail.

Rising real incomes fuel consumer spending

Such strong economic growth coupled with growing populations has contributed significantly to rising incomes in emerging economies. This has fuelled burgeoning domestic markets that have helped to absorb the blow from the drop in demand from developed economies.

  • The number of middle class households (households with annual disposable incomes between US$5,000 and US$15,000) in emerging market economies increased by 90.5% in real terms between 2000 and 2011; Click to tweet!
  • Growth in real private final consumption expenditure per capita between 2006 and 2011 also reflects the increase in consumer demand. Average real growth of private final consumption expenditure per capita across all emerging economies was 21.9% but in China it grew by 49.3%, by 34.8% in Indonesia and 29.8% in Brazil. In developed economies, real private final consumption expenditure per capita actually decreased over the same period, by 5.7% in the United Kingdom, 2.3% in Japan and 1.2% in the USA;
  • Annual gross income per capita in developing economies increased by 26.5% in real terms between 2006 and 2011 and this figure is set to increase by a further 42.4% between 2012 and 2020;
  • It will still be some time before per capita incomes in developing countries catch up with their developed counterparts. In 2011, average annual gross income per capita in developed economies was US$38,481 while the corresponding figure for emerging markets was 7.3% of that at US$2,803. Click to tweet! By 2020 the emerging markets figure will still be just 9.3% of the developed economies at US$4,157 in real terms.

Real Period Growth of Annual Disposable Income Per Capita in Selected Emerging and Developed Economies: 2006-2011

ScreenHunter_03 May. 31 10.00
Source: Euromonitor International from national statistics

Note: (1) China, India, Indonesia, Brazil and Pakistan were the five most populace emerging market economies in 2011. (2) USA, Japan, Germany, France and the United Kingdom were the five most populace developed economies in 2011.

Trade and investment in emerging markets

While domestic consumption is rising in emerging markets, so too is foreign investment and trade. China overtook Germany as the world's largest exporter in 2009 according to Euromonitor, and is poised to become the largest importer of foreign goods by 2020. Click to tweet! In terms of investment, Foreign Direct Investment (FDI) inward and outward stocks increased by 43.3% and 64.6% in real terms respectively in emerging economies between 2006 and 2010 (latest year available) as investors took advantage of maturing business environments and competitive markets.

  • Foreign direct investment inflows were worth US$106 billion to the Chinese economy in 2010 (last year available). Brazil saw the greatest investment growth of all emerging economies in absolute real terms as an extra US$22.8 billion of foreign inflows were pumped into its economy between 2006-2010, thanks to its plentiful natural resources and preparation for the World Cup in 2014 and the Olympics in 2016;
  • Saudi Arabia had the largest trade surplus of the emerging market economies as well as in global terms in 2011, with exports outstripping imports by more than US$257 billion, primarily due to the sheer amount of oil it exports. Click to tweet! Russia had the second largest trade surplus of the emerging market economies, having exported over US$198 billion more than it imported in 2011. A trade surplus is common to emerging market economies, especially those who are resource-rich, as the developed world relies on these exports for so much of its energy needs;
  • There continues to be high demand for goods and services from emerging markets, due to the relative weakness of their currencies in comparison to the US dollar, the pound sterling and the euro. Exports from emerging markets grew to over US$7 trillion in 2011, having increased by 347% in US$ terms since the year 2000. However, weaker demand from advanced economies that are battling high-debt, low growth scenarios will exert pressure on exports from emerging markets, although an increase in intra-regional trade will help to offset this.

Prospects

In terms of long-term investment potential, overall growth and expanding consumer markets, emerging market economies have become more important and will continue to develop economic power relative to their size and capabilities. However, while there may be a global rebalancing in terms of economic power, the developed economies will still punch far above their weight and inequalities will still exist.

  • Overall growth in emerging markets will continue to outstrip that of developed economies between 2012 and 2020, with developing countries forecast to grow by an average of 59.5% in real terms and developed countries expected to grow by 21.9%;
  • Population growth coupled with continued strong economic growth will fuel discretionary spending as households look to spend on more than just the basic essentials. By 2020, the number of households in emerging markets with an average annual disposable income of over US$100,000 in real terms is forecast to reach 25.1 million by 2020, up from 13.6 million in 2011;
  • Subdued growth in developed economies such as the USA, the UK and the eurozone countries, as they recover from the global economic downturn of 2008-2009 and reduce their sovereign debt levels, will still have a dragging effect on trade and investment in emerging markets. Developing economies will still need investment from developed economies to use as a means to finance development, increase productivity and import new technologies.

 


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