[SCMP Column] World's middle class set for sea change within 15 years

April 23, 2015



 

It is maybe bad enough to confess that every Saturday I curl up with the House & Home property supplement of the Weekend FT for a voyeuristic glimpse inside the genteel lives of the global rich and uber-rich. So imagine my embarrassment having to confess that I have to credit a major House & Home article two weeks ago for inspiring a rare “eureka” moment that I need to share.

There on the front page of House & Home was one of those multi-coloured data-strewn world maps that at first send your head into a spin. Once I got through the initial “data-shock” moment I realised I was looking at something really quite significant. It was based on research from the Brookings Institution in the US, and was all about where the world’s middle class consumers will be by 2030.

But before I allowed myself to become excited, a little “data alarm bell” went off: how are they defining “middle class”? I have already – preposterously – been told breathlessly about India’s 400 million middle class consumers – only to discover that these “middle class” have electricity, running water, a bicycle and perhaps a refrigerator: hardly in the category of a middle class Parisian with a poodle and a Prada bag, drinking anis at a corner café on the Champs Elysees.

But this research seemed reasonable: “middle class” meant someone spending between US$10 and US$100 a day in purchasing power parity (PPP) terms. The world of PPP is a weird one, but let’s not be too persnickety – this definition meant a person can afford a Starbucks, has more than one pair of shoes, has an iPhone, and a computer at home.

So why did this Brookings research make my hair stand on end? First, where the world’s middle class live: in 2009, 664 million of them were in Europe and 338 million were in North America – 54 per cent of a world total of 1.85 billion middle class. The Asia-Pacific, with 525 million, accounted for 28 per cent.

But now look at the world they predict in 2030: Europe’s middle class will grow slightly to 680 million, while in North America the middle class population will shrink slightly to 322 million. But by then, the Asia-Pacific will account for 3.23 billion middle class consumers. From 28 per cent of the world’s middle class consumers today, the Asia-Pacific will by 2030 account for 66 per cent of a global total of 4.88 billion middle class. The US and Europe combined shrink from 54 per cent today to account for just 21 per cent.

If that was not shock enough in terms of imagining the shift in global consumer gravity between now and 2030 – after all, just 15 years away – their data on middle class consumption by 2030 had me reeling. Middle class consumption in Germany will be $1.3 trillion, and in France $1.1 trillion. The US at $4 trillion will still be significantly larger. But then look at Asia: middle class consumption in Japan will be a predictable $2.3 trillion. But then look at Indonesia ($2.5 trillion); China $10 trillion; India $12.8 trillion.

In short, whereas today Europe and North America dominate world middle class consumption, accounting for 64 per cent of a total of $21.3 trillion (a dominance that has stayed steady for most of the past 200 years), by 2030, that share will have fallen to 30 per cent of a total of nearly $56 trillion. The Asia-Pacific, driven by consumers in India and China, will have risen from 23 per cent of consumption today, to 59 per cent.

If these predictions are anywhere near accurate, and if I were CEO of a manufacturer based in Frankfurt or Birmingham or Dallas, the message is clear: build an Asian presence as soon as possible.

I had a surreal feeling absorbing all this data, because India’s economy seems as quagmired as ever, and because we are still obsessively anxious about faltering growth in the Chinese economy, and the dramatic impact of the anti-corruption campaign on luxury spending on the Mainland.

As China’s leaders try to reduce reliance on exports for economic growth, their progress in building domestic consumption seems to be making little progress. Household consumption as a proportion of GDP has actually fallen since 2009 from 38 per cent to 36 per cent.

Of course, Brookings could be horribly wrong. But if not, then somewhere soon, these two seemingly divergent trends will converge. My own bet is that they are more-or-less right. In which case, I feel much more comfortable sitting in Hong Kong than I would sitting with a glass of anis on the Champs Elysees. The shape of the world economy is changing radically. And much more rapidly than we realise.

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