Improved Consumer Spending Growth in 2016 but Opportunities Will Become Harder to Capture

Global consumer expenditure growth is expected to accelerate to 3.0% year-on-year in real terms in 2016 from 2.3% in 2015, largely on account of recovery in key emerging markets. Yet, compared to the period prior to 2015, emerging and developing economies are entering an era of slow growth.

At the same time, in developed economies, as the boost to consumer spending from low energy prices fades, it is not always going to be easy to convince consumers to part with their cash. Understanding how the global consumer markets will develop in 2016 and beyond is crucial for consumer goods companies to identify growth opportunities and win new consumers.

Global Consumer Expenditure and Annual Disposable Income Growth: 2009-2016

Source: Euromonitor International from national statistics/Eurostat/UN/OECD

Note: Data are in 2014 constant prices; Data for 2015 and 2016 are forecasts.

Consumption in developed economies will be broadly stable

Real consumer expenditure in developed countries is forecast to grow by 2.3% year-on-year in 2016, marginally up from the 2.2% recorded in 2015. The boost to consumer spending from lower energy prices is expected to fade as prices are set to rebound in 2016 while the underlying drivers for consumption growth in developed economies will remain largely unchanged:

• On the back of improved economic performance in developed countries particularly the eurozone, the USA and Japan, the labour market in the developed world will tighten with unemployment falling to 6.5% of the economically active population in 2016, down from 6.8% in 2015;

• Nevertheless, businesses are not expected to raise salaries and wages significantly and household income growth will therefore remain modest. On average, real household annual disposable income in the developed world will grow by 1.2% year-on-year in 2016, slightly down from the 1.3% growth recorded in 2015;

• Interest rates and the cost of consumer credit are likely to remain low, although consumer prices will likely start to increase as the average inflation in developed economies is set to reach 1.7% in 2016, from 0.5% in 2015. In many countries, rising inflation will reflect currency depreciation, which pushes up prices of imports, rather than consumer market dynamism. Therefore, we do not expect interest rates to rise significantly during 2016.

Of the major developed markets, the USA is expected to achieve the fastest consumer expenditure growth in 2016, as it maintains the 3.0% real growth achieved in 2015. Meanwhile, Japan will see the strongest recovery in consumption, although the country’s consumer expenditure growth will only be a modest 0.6% in 2016 (compared to -1.2% in 2015). This means that even in the best-performing developed markets, consumers will not necessarily part with their cash more easily in 2016 and companies will need to rethink their strategies in order to identify pockets of growth and generate sales in mature markets.

Consumer Expenditure Growth in the Five Largest Developed Markets: 2015 and 2016

Source: Euromonitor International from national statistics/Eurostat/UN/OECD

Note: Data are forecast. The five largest developed markets are measured in total consumer expenditure as of 2015.

Moderate growth expected in emerging and developing countries

Real consumer spending growth in emerging and developing economies is set to pick up to 4.4% in 2016, from 2.5% in 2015. This recovery in consumption will be in tandem with the projected improvement in economic conditions in Russia and other commodity exporting countries in Latin America, Africa and the Middle East and Asia, where prices of key commodities including crude oil, natural gas and iron ore are expected to rebound in 2016 and support the labour market as well as household income and expenditure.

Compared to the period prior to 2015, however, consumer spending growth in emerging and developing countries will be moderating to a “new normal” from the above-trend growth recorded in the past. Emerging markets which were previously celebrated for their stellar consumer expenditure growth will become harder for businesses to expand to while companies that are already present in those markets must now adjust to a slow growth era. In China, for example, despite the shift to a consumption-driven economy, consumer expenditure is set to increase by 7.4% in 2016, which is similar to the 7.3% achieved in 2015 but considerably lower than the average real growth of 10.1% per year recorded over the 2009-2014 period.

Annual Real Growth in Consumer Expenditure in the BRIC: 2009-2016

Source: Euromonitor International from national statistics/Eurostat/UN/OECD

Note: Data for 2015 and 2016 are forecast.

Identifying and seizing opportunities

Despite slowing long-term growth in emerging markets and subdued demand in developed markets, companies can still identify and capture growth opportunities in both developed and emerging markets:

• In 2015, Arçelik AS – the Turkish manufacturer of Beko brand home appliances – expanded outside the saturated markets of Western Europe by setting up a factory in Thailand to produce for the whole Southeast Asian region. In doing so, Arçelik AS will not only reduce its traditional reliance on Western Europe, but will also gain cost-effectiveness and benefit from an integrated market and production base that the ASEAN Economic Community (AEC) will have to offer;

• Meanwhile, Unilever has uncovered a new path to growth in developed markets as it expanded into a range of high-end products. The global consumer-goods giant is traditionally known for mass-market brands and its strong presence in emerging markets. But, in view of sluggish growth outlook in emerging markets and declining sales in developed markets, Unilever is pushing upmarket in Europe and North America where it sells premium products such as Maille mustard, T2 tea and Talenti artisanal ice cream. In 2015, the company further acquired four niche skincare brands (Murad, Dermalogica, REN and Kate Somerville) as part of its premiumisation strategy to drive sales growth in developed markets.

As opportunities are becoming harder to identify and capture, companies will need to be more innovative in devising their strategies – by either reducing the reliance on one core market, expanding beyond traditional category, or identifying cross-country consumer segments in order to be more targeted but also more cost effective.