Global Themes - Current Headwinds Aside, EM Consumption Boom To Persist

Over the coming decade, we expect emerging markets to increase their proportion of global consumption from 29% to 41%. This is a substantial shift in global consumption patterns, considering that emerging markets made up a mere 7% of global consumption as recently as 2000.

  • In the next year or two though, emerging market consumption is likely to experience headwinds. Currency weakness will weigh on the purchasing power of households in several key countries, including Russia, Turkey, and Brazil.

  • While household consumption in the world's largest market, the US, has recovered to pre-crisis levels, it is still significantly below the long-term trend. For the eurozone, a recovery is nowhere in sight at this stage.

  • Emerging Market Consumers To The Fore
    Global Real Consumption Growth (%)
    • Over the coming decade, we expect emerging markets to increase their proportion of global consumption from 29% to 41%. This is a substantial shift in global consumption patterns, considering that emerging markets made up a mere 7% of global consumption as recently as 2000.

    • In the next year or two though, emerging market consumption is likely to experience headwinds. Currency weakness will weigh on the purchasing power of households in several key countries, including Russia, Turkey, and Brazil.

    • While household consumption in the world's largest market, the US, has recovered to pre-crisis levels, it is still significantly below the long-term trend. For the eurozone, a recovery is nowhere in sight at this stage.

    Global: We are forecasting aggregate global consumption growth of 2.7% in 2014 and 3.0% in 2015, which would mark a comeback of sorts following average annual growth of 2.4% between 2011 and 2013. With developed states making up around 71% of global consumption (weighted by our US$ nominal-weighted GDP series), it is no wonder that the biggest reason for the acceleration in growth is due to an improvement in the fortunes of households in the developed world, with consumption growth doubling from 0.4% to 0.8% from 2013 to 2014, and moving higher again to 1.1% in 2015. Over the coming decade, though, emerging markets will continue to have the upper hand in growth by a substantial margin, with consumption rising by 5.6% annually on average in real terms, versus a mere 1.3% in the developed world.

    Emerging Market Consumers To The Fore
    Global Real Consumption Growth (%)

    With such a large growth differential, emerging markets will go from representing 29% of global consumption in 2014 to 41% by the end of our ten-year forecast period to 2023. China's share of consumption will rise to around 13% from 9.0%, while the Middle East and Africa will see the largest percentage point gain, from 6.5% to 10.3%. Although developed markets will retain their dominance, North America's share (largely consisting of the US) will decline from 33% to 27%, while developed Europe will decline from 24% to 19%.

    Developed World Consumers' Importance Will Wane
    Global Consumption By Region, % of Total (LHS = 2014; RHS = 2023)

    This may yet prove optimistic for developed Europe, at least. Consumption in the eurozone and the US have been diverging since the global economy bottomed in 2009. US real retail sales have come all the way back to 2007 levels, while the eurozone, weighed down by a difficult economic adjustment in the periphery, is back to 2003/04 levels, implying a lost decade for consumption. Growth in US retail sales volumes has been slowing since late 2013, though we believe that this is largely due to one-off factors such as poor weather. Eurozone sales have encouragingly returned to positive year-on-year growth territory since late 2013, but there is a long way to go yet to recover lost ground.

    US Outpacing Eurozone
    Real Retail Sales Rebased To Jan 2007 = 100

    We maintain our view that with the household deleveraging process largely complete, confidence improving and employment coming back, real private consumption growth in the US will accelerate to 2.5% in 2014 from our estimate of 2.2% in 2013. While the US consumer story remains relatively encouraging, the 2008-09 financial crisis and recession have left scars that have yet to heal. Extrapolating the 1992-2007 trend in real retail sales indicates that absent the recession, retail activity would otherwise be 15% higher than it is currently. This gap represents a significant chunk of global consumption activity that has yet to be fully recovered.

    US Consumer Coming Back, But Volumes 15% Below Trend
    US - Real Retail Sales And Trends

    Asia - Private Consumption Growth To Accelerate Over The Next Decade: Although we forecast real GDP growth in Asia to slow from an average of 5.1% per annum from the last decade to 4.7% over the next ten years, this masks a significant acceleration in private consumption growth. Indeed, we forecast real private consumption growth in the region to pick up from an average of 4.5% in 2004-2013 to 5.8% over the period between 2014 and 2023, which will bode well for Asia's consumer story. We believe three broad dynamics will be at play. First, the growth model is changing away from investment and export-led growth towards a more sustainable, consumption led-growth model. Second, real wages and incomes will continue to rise, and third, an increase in financial depth and access to credit will drive lending and consumption growth. In China, the new leadership is pushing forward with economic reforms aimed at raising private consumption as a share of GDP from the current low levels of about 35%. As such, although we see real GDP growth slowing sharply in China from about 10.0% in the past decade to 6.0% per annum out to 2023, private consumption growth will continue to average a strong 8.1% over the period.

    Asian Consumption Is The Place To Be
    Asia - Real Private Consumption Growth %

    Three other countries that stand out are Japan, South Korea and Indonesia. In Japan, Abenomics should see real private consumption growth accelerate from an average of 1.0% to 1.7% over the forecast period, as rising inflationary pressures will likely see a dip in savings. However, the risk is that an outright collapse of the currency or an implosion of the government's fiscal accounts could derail any improvement in private consumption, particularly given that Japan faces a rapidly ageing demographic profile. In South Korea, consumers are already highly leveraged, but the government's 474 economic reform initiative aims to increase employment levels to 70% from 65% currently and raise per capital incomes to US$40,000 over the coming years from US$25,000, which should see average private consumption growth double from 2.6% to 5.2%. In Indonesia, we expect that an improving business environment, combined with a strong demographic profile, rising incomes and very low banking sector penetration by regional standards, will help boost private consumption from an average of 4.7% to 6.3% over the forecast period.

    Latin America - Currency Weakness Will Continue To Overshadow Private Consumption: Shifting global trade dynamics and the onset of monetary policy normalisation in the US have already had profound consequences for Latin American consumers. Major exchange rate weakness since May 2013 as a result of capital outflows has weighed on household purchasing power. Falling commodity prices, particularly for industrial metals, are further compounding consumer weakness in Brazil, Chile and to a lesser extent, Peru. With limited room to provide monetary stimulus, particularly with structural inflation in Brazil seeing the central bank engage in an aggressive hiking cycle, we believe that policymakers have few options to bolster private consumption. And despite traditional drivers of economic growth in industrial metals exporting markets disintegrating amid a slowdown in the Chinese economy, governments are increasingly mindful of expansionary fiscal policy. This has already seen the Brazilian government, with the prospect of a sovereign credit rating downgrade looming, announce spending cuts in an election year.

    Exchange Rate Volatility Eats Into Household Purchasing Power
    Latin America - Rebased Exchange Rates (LHS) & Real Private Consumption Growth, % (RHS)

    Although currencies such as the Brazilian real and the Chilean peso have already sold off a great deal, we do not rule out additional exchange rate depreciation this year. Brazil once again stands out, as we forecast the current account deficit to widen from 3.6% of GDP to 4.2% this year and some rebalancing will be required. We believe that the path of least resistance for economic rebalancing will be exchange rate weakness, and that continued monetary tightening alongside additional exchange rate weakness will continue to crimp consumer spending. We forecast real private consumption growth in Brazil to continue to drop to 2.0% this year, having fallen from 3.2% to 2.3% in 2013, according to our estimates. Chile, too, will see real private consumption growth drop to 3.5% from 4.7% in 2013. Argentina and Venezuela, which continue to suffer from sizeable exchange rate devaluations and double-digit inflation, are seeing the sharpest declines in household consumption growth.

    The exceptions to the rule in the region, however, are Colombia and Mexico, which stand to benefit from more favourable trade dynamics thanks to a continued strengthening of the US economy. We forecast Colombian real private consumption growth of 4.4% this year, up moderately from 4.0% in 2013. Moreover, improvement in manufacturing and construction activity in Mexico, as well as stronger capital inflows on the back of energy market liberalisation, will prop up the Mexican peso, further bolstering household purchasing power. Real private consumption in Mexico will grow by 3.3% this year, up from an estimated 2.6% in 2013.

    Emerging Europe - Central Europe Consumption To Outperform:Central Europe's export-led recovery has begun to drive material improvements in consumption (see chart below). Despite this, considerable slack exists in the labour market, which along with subdued supply side factors, is preventing a build up of inflationary pressure. Consequently, interest rates have remained low, keeping economic conditions in the sweet spot for households. With external demand from Germany and the wider eurozone expected to continue improving throughout the year, spurring further employment gains, we expect household consumption to be one of the main drivers of regional real GDP growth in 2014.

    Consumption On The Rise
    Central Europe - Retail Sales Volume And Harmonised Index Of Consumer Prices

    In the Baltics, however, we see growing risks to what has been a pretty impressive consumption story over the last 12 months. First, rapidly rising employment and strong wage growth imply that inflation has the potential to rise more sharply in the coming year relative to central Europe, eating into household purchasing power. Second, consumption has remained strong despite faltering export growth, which we do not believe is sustainable beyond the short term due to the extremely open nature of the Baltic economies. With all three Baltic countries heavily integrated with each other and Russia, a less favourable export market relative to central Europe implies material risks to employment and consumption as political risk in the region has the potential to disrupt trade flows in the coming quarters.

    Nevertheless, the worst hit consumers will be in Turkey and Russia. In Turkey, a contraction of real private consumption growth in 2014 will be the main driver of a sharp slowdown in headline GDP, according to our estimates. In Russia, we also expect a steady decline in private consumption growth in the coming years. In both countries, consumption had been supported by strong credit growth, which we do not expect to continue in 2014 following monetary tightening, capital flight and policy uncertainty which will weigh on both the supply and demand for credit. Furthermore, a sharp sell-off in the lira and rouble will contribute to rising inflation and diminished household purchasing power. We forecast both currencies to remain susceptible to external volatility and on a depreciatory trajectory in the coming quarters, implying that the central banks will have to maintain a relatively hawkish stance despite weakening domestic demand.

    Sub-Saharan Africa - Consumption Growth Story Is Real, But Nuance Required: BMI is a firm believer in the idea that private consumption is - and will continue to be - a major driver of economic growth in most Sub-Saharan African countries. As the charts below illustrate, we are forecasting private consumption to contribute more than 60% of headline growth in eight out of the ten most promising African markets identified in BMI's Africa Lions Special Report over the coming decade. According to our forecasts, private consumption will make up an average 69% of headline growth in these markets over the next ten years continuing a trend from the last decade.

    Private Consumption Will Continue To Be A Major Driver
    Africa - Average Annual Contribution To Headline GDP Growth, pp in 2003-2011 (LHS) & 2013-2023 BMI Forecasts (RHS)

    In addition to the base effects of a low starting point for consumption compared to other more developed regions, favourable demographic profiles and improving business environments, we believe that increasing leverage will drive private consumption. Private sector credit represents less than 50% of GDP in most SSA countries with lending to households only making up a fraction of total outstanding credit. We believe that innovations such as mobile money services will contribute to the development of consumer lending facilitating increased spending on higher cost goods and services.

    Despite this broadly positive outlook, we believe that optimism surrounding the African consumer story requires some nuance. Firstly, given the economic profile of most countries in the region, we believe that the consumer market will remain segmented. The bulk of demand will come from Africa's 'middle class', the definition of which captures consumers in lower income brackets than in more developed markets. This middle class will demand high-volume, low-margin goods rather than the discretionary goods that are often associated with consumption booms in the more developed markets. That is not to say that there will not be demand for higher end goods from Africa's political and economic elite, but this pool of consumers is likely to remain small over the next decade. Additionally, the consumer boom of the last decade has been accompanied by a broad decline in manufacturing on the continent, demonstrating that consumer demand has largely been met by imports rather than domestic production. This is because, for the most part, African manufacturers cannot compete with foreign producers due to weak business environments and deficient infrastructure in particular. We do not see this situation changing rapidly and we therefore believe that service providers such as retailers stand to benefit far from the consumption growth than do African-based manufacturers.

    Middle East & North Africa - North Africa: Subdued Private Consumption Growth In 2014: The outlook for private consumption in North Africa is subdued, despite the low base effects of the past few years. High unemployment, a reduction in government spending and limited growth in remittances will keep growth in private consumption across the region relatively muted in 2014. Morocco will see the sharpest slowdown in real growth in private consumption, falling from 3.6% in 2013 to 2.2% this year. Rural incomes are likely to stay flat given limited growth prospects for the agricultural sector this year, following an exceptional harvest in 2013. At the same time, a heavier tax burden and cuts to fuel subsidies will weigh on households' purchasing power. A recovery in remittances is also unlikely this year, given persistently high unemployment in France and Spain, the main destinations for Moroccan migrants. We forecast a similar growth trajectory in Egypt as a recovery in the tourism sector (which employs around 10% of the population) appears unlikely in the near term, thus we see real private consumption growth reaching 3.0% in 2014, from an estimated 3.1% in 2013.

    Broad Slowdown In 2014
    North Africa - Private Consumption Real Growth % y-o-y

    Libya will record the fastest growth in private consumption, but this mostly comes on the back of low base effects. Revenue losses from declining oil exports will hinder the administration's ability to increase public spending, whilst we see little growth in the private sector on the back of political instability. In a similar vein, Tunisia's austerity budget for 2014 will keep a lid on private consumption growth this year, despite a slight improvement in the political outlook.

    Algeria will see the largest uptick in private consumption growth in North Africa on the back of an expansion of public spending as the government seeks to maintain support ahead of presidential elections set to take place in April. Given that public sector employment accounted for approximately 12% of the total in 2010 (the last year for which data is available), a figure which has likely increased significantly over recent years, this year's expansionary fiscal policy will support growth in consumer demand.

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