The most influential Megatrends set to shape the world through 2030, identified by Euromonitor International, help businesses better anticipate market developments and lead change for their industries.
The middle class in emerging countries has continued to grow and enjoy higher purchasing power since the 2008-2009 global financial crisis while middle-class households in many developed markets have had to cut back on their spending. Rising spending in emerging economies will create wide-ranging opportunities, but as the patterns of middle-class spending growth are diverse, companies will need to fully understand the target market and adapt their business strategies accordingly.
Half a decade after the global financial crisis of 2008-2009, the fortunes of the global middle class remain mixed. Across the 85 major economies for which Euromonitor International has data, middle class households totalled 475 million in 2014, up from 430 million in 2008 at the start of the global financial crisis. However, 13 out of these 85 major economies have a shrinking middle class, and the decline is not restricted to developed economies;
In a number of countries, where the middle class has expanded in size, middle-income households are not necessarily better off. For example, while Kuwait and the UAE have seen some of the world’s fastest middle class expansions, median household income in both countries fell at the fastest rates globally since 2008. This is because expanding middle class reflects improving income distribution while median household income is a proxy of middle-class purchasing power;
The middle class in many developed economies have experienced falling or sluggish income growths and consequently tightened their purse strings. In emerging and developing countries, on the other hand, the middle class has increased their spending but the growth patterns are diverse, which present wide-ranging opportunities as well as challenges to businesses looking to expand to emerging markets;
In selecting an emerging market to enter or expand to, consumer-focused businesses will find the greatest commercial opportunities in countries with strong rates of growth in both middle class size and median household income. China, for instance, is a promising market, because it has a substantial middle class which expanded by 14.7% over 2008-2014, and a robust 71.8% real increase in median income over the same period;
By 2030, the number of middle class households in 85 key economies is expected to reach 563 million, up by 18.6% over 2014. The bulk of this growth will come from emerging markets, with Guatemala, Nigeria, Egypt, Malaysia and Kenya expected to lead with the fastest growth in the number of middle class households over the period through to 2030. Meanwhile, middle-class expenditure across emerging markets will continue to rise healthily through to 2030 on the back of continued economic growth and rising disposable income.
Who is the middle class?
The middle class is a social classification that broadly reflects the ability to lead a comfortable life:
The middle class usually enjoy stable housing, healthcare, educational opportunities (including university) for their children, income security, and discretionary spending capacity. Because standards of life vary across countries, there is no absolute, universal definition for the middle class;
The middle class as the subject of this report is simply the “statistical middle” comprising of households in middle income groups, which reflects the different levels of income and standards of living in different countries. As such, middle class households are those with an annual disposable income between 75.0% and 125% of the median income. The median income is the amount which divides the household income distribution into two equal groups, half having disposable income above that amount and half having income below that amount;
In 2014, the number of middle class households across the 85 major economies that Euromonitor International has data for stood at 475 million, up by 10.5% from 430 million in 2008 at the start of the global financial crisis.
Size and purchasing power of the global middle class
The fortunes of the global middle class is more complicated than a simple description of “growing” or “shrinking” since the 2008-2009 financial crisis:
Since the onset of the global financial crisis in 2008, the middle class has shrunk in 13 countries (including six emerging countries) out of the 85 major economies. The biggest contraction was seen in Estonia where their number fell by 10.6% between 2008 and 2014, followed by Indonesia by 9.4%;
Meanwhile, the middle class expanded robustly (by over 20.0% during 2008-2014) in 15 countries, most of which (with the exception of Singapore) were emerging and developing economies with robust and resilient economic growth. The number of middle class households (with between 75.0% and 125% of median income) grew the fastest in the United Arab Emirates (UAE, 40.3%), Qatar (40.5%), Pakistan (41.7%) and Kuwait (53.5%) over the 2008-2014 period;
In some countries where the middle class expanded, middle-income households have not necessarily been better off. For example, while Kuwait and the UAE have seen some of the world’s fastest middle class expansions, median household income in both countries fell at the fastest rates globally since 2008;
Median Income Growth and Middle Class Size and Expansion in Top 10 Countries with Fastest-Growing Middle Class: 2008-2014
Source: Euromonitor International from national statistics
Note: Size of the bubbles denotes the size of the middle class in 2014.
The reason behind this paradox is that middle class size and median income are two different indicators. Rising number of middle class households reflects improving income distribution while median household income is an indicator of purchasing power. To consumer goods companies, however, both measures are equally important, because a small middle class with high purchasing power will not equate to high aggregate expenditure, and vice versa;
Between 2008 and 2014, real median household income fell in 31 (out of 85) countries, with Kuwait (44.0%), Greece (39.3%), the UAE (30.7%), Slovenia (20.2%) and Italy (19.7%) being the top five countries with the largest real declines in median household income. Out of the 32 developed economies, the median household income fell in 17 countries and in the remaining 15 countries its growth was either sluggish or stagnant. On the other hand, the emerging economies of Uzbekistan, Turkmenistan, China, Argentina and Kazakhstan ranked as the top five countries where middle-class purchasing power increased the most over the 2008-2014 period.
The middle class’s changing spending patterns
In developed countries, falling or sluggish income growths have resulted in the middle class tightening their purse strings:
Between 2008 and 2014, real total spending by decile 5 (which represents 10.0% of households in the middle income stratum) grew by a modest 2.2% in Germany (the eurozone’s largest economy) and fell by 2.2% in Japan. In the USA, where the number of middle class households is highest globally, total expenditure by decile 5 rose by 17.7% in real terms over the 2008-2014 period, but much of this growth was due to consumer credit as US median household income increased by a negligible 0.2% over the period;
While middle-class households in developed economies still enjoy higher purchasing power than their counterparts in the developing world, their spending patterns have been changing since the global financial crisis. Households are saving more and cutting back on their spending, especially on big-ticket and discretionary items.
On the other hand, the middle class in many emerging and developing economies have enjoyed rising income and expenditure on the back of robust economic growth:
Between 2008 and 2014, decile 5’s total spending in China grew by 140% in US$ terms – the second highest growth globally (after only Uzbekistan, at 155%). As of 2014, China’s middle class expenditure was the second highest globally, totalling US$301 billion (after the USA at US$920 billion);
The growth patterns of middle class spending in emerging markets are diverse. For example, in Indonesia, middle class expenditure on education advanced the most (by 91.3% over the 2008-2014 period) while in India, miscellaneous goods and services (which include jewellery) stood out as the category with the fastest middle-class spending growth (115% over the same period). This diversity in growth patterns of middle class expenditure provides exciting opportunities across a wide range of sectors for businesses looking to expand to emerging markets, especially amid sluggish demand growth in developed economies. Yet this diversity can be challenging in that companies will need to fully understand the target market and adapt their business models and plans accordingly;
In selecting an emerging market to enter or expand to, consumer-focused businesses will find the greatest commercial opportunities in countries with strong rates of growth in both middle class size and median household income. For example, China can be identified as a promising emerging market, because it has a substantial middle class, which expanded by 14.7% over 2008-2014, and a robust 71.8% real increase in median income over the same period. Particularly promising sectors are transport and household goods and services, as these are the two categories on which Chinese middle-class households increase their spending the most since 2008.
Growth indices of fastest-growing categories for decile 5 in China: 2008-2014
Source: Euromonitor International from national statistics
Note: Growth index is calculated in US$ terms, with base year 2008=100.
By 2030, the number of middle class households in 85 key economies is expected to reach 563 million, up by 18.6% over 2014. The bulk of this growth will come from emerging markets, with Guatemala, Nigeria, Egypt, Malaysia and Kenya expected to lead with the fastest growth in the number of middle class households over the period through to 2030;
In developed markets, middle class households are expected to continue to rein in their spending in an effort to save up and rebuild lost wealth which was a result of the 2008-2009 financial crisis. On the contrary, consumer spending is expected to continue to rise through to 2030 on the back of continued economic growth and rising disposable income. While Chinese middle-class households are widely expected to hold the potential of driving long-term global demand growth (thanks to their large number), the middle classes in other major emerging markets such as India, Russia, Egypt, Pakistan and the Philippines will also experience robust gains in consumer expenditure;
As well as driving global demand and consumption, middle classes in emerging markets are also playing an important role in socio-economic and political development. As a consequence, middle class expansion in emerging economies will not simply boost demand in emerging markets, but will also lead to improved labour quality, better business environment and ultimately a virtuous cycle of rising investment and economic growth.
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