Although consumer expenditure is expected to grow in 2013 across Asia Pacific’s five largest consumer markets – Japan, China, India, South Korea and Indonesia, the overall mood of the consumer is subdued as a result of continued economic uncertainty with weaker-than-expected growth in China and sluggish demand from Europe. We also see unstable currencies stoking up prices of imported goods and undermining consumer confidence across the region’s largest markets. However, at Euromonitor International we think these are only near-term risks to the consumer markets, as long-term potential, especially of the emerging markets of China, India and Indonesia – also the world’s major emerging markets – is great thanks to rising incomes and expanding middle classes.
Total Consumer Expenditure in Top Five Consumer Markets in Asia Pacific: 2012
Source: Euromonitor International from national statistics /UN/OECD
1. Japan: Cautious consumers and businesses in the face of market correction
Despite being the largest consumer market in Asia Pacific and the second largest in the world (behind the USA) as of 2012, the Japanese consumer market is characterised by cautious consumers and slow growth. Following the introduction of a mix of government spending, quantitative easing and structural reforms (dubbed as Abenomics), consumer sentiment improved initially in the first quarter of 2012 on rising share prices, driven up further by a weaker yen. However, Japanese stock market correction seen during the second quarter of 2012 indicates economic uncertainty, as businesses remain cautious Prime Minister Shinzo Abe’s efforts to reinvigorate the Japanese economy. This means few companies will commit themselves to core pay increases and hiring programmes in 2013, with knock-on impact on consumer spending. Other near-term risks to the Japanese consumer market include rising costs of imported goods (including energy) due to a weaker yen, and consumption tax hikes in 2014 and 2015.
2. China: Consumer market expansion despite slowing economic growth
Despite prevailing discussions on a slowing Chinese economy, consumer spending in China will continue to grow robustly in 2013 and beyond, especially as the country’s economic structure gradually shifts away from exports towards domestic consumption. Furthermore, China’s consumer spending habits will also change towards greater discretionary spending, with spending on insurance and on jewellery, silverware, watches and clocks, travel goods being the fastest-growing discretionary spending categories. In 2013, China’s total consumer expenditure is forecast to grow by 9.0% in real terms over a year earlier, up from 8.7% in 2012.
3. India: Weakening of the rupee to hurt consumers
The Indian rupee plunged to a record low against the US dollar in mid-June 2013 amid the wider picture of emerging market sell-off (due to concerns over the prospect of the US Federal Reserve reining in its bond-buying programme) whilst investors were also worried about India’s record high current account deficit. The falling currency will make imported goods more expensive, hurting consumers in Asia Pacific’s third largest consumer market. A depreciating currency together with crippling inflation and high interest rates are holding back business investment in India, weighing down on the country’s sluggish economy and weak consumer market. However, the long-term potential of the Indian market remain huge thanks to its sheer size and the fact that Indian consumers under-consume.
4. South Korea: Indebted consumers uncertain about economic prospects
With the household debt-to-GDP ratio for South Korea standing at 87% in 2012, well above the average for all industrialised countries, debt-strained households in South Korea are cutting back on spending. In the first quarter of 2013, consumer expenditure fell by 2.4% in real terms over the same period of the previous year – the largest fall since the 2008-2009 global recession. South Korean consumers saw slowing disposable income growth in the first quarter of 2013 whilst they also remain uncertain about prospect for the country’s export-dependent economy. Consumer spending received a boost from tax breaks for home purchases and lower borrowing costs following the Bank of Korea’s rate cut in May 2013, but unless the economy improves, these measures will only be temporary and not enough to revive private consumption.
5. Indonesia: Rate hike could be the start of a longer monetary tightening cycle
Like other markets in the region, Indonesia also faces mounting inflation, a falling currency as part of wider emerging market sell-off, and relatively weak economic prospects for 2013. In June 2013, the central bank raised the costs of borrowing in a pre-emptive move against higher inflation expectations. This is likely to be the start a longer cycle of monetary tightening. However, the fact that the Indonesian consumer market has been resilient ever since the 2008-2009 global economic downturn means that consumers will likely remain confident and carry on spending in 2013, making private consumption a bright spot in the wider economic picture. Long-term potential of the consumer market is also great in Southeast Asia’s largest economy thanks to the large and youthful population and an expanding middle class.