Building a new economic identity: What’s driving the booming consumption from the East?

Asia will drive 40% of the world's consumption by 2040. We look at how the consumption boom is changing EM for good.

One of the most dramatic economic developments in the past two decades has been the rapid integration of emerging markets across Asia into global flows of trade, capital and innovation. Consumption has become a much greater driver for these economies, enabling them to transition from merely participating in these flows to actively shaping their direction.

There are few nations on the planet where consumer spending is increasing as rapidly as India. With urbanisation and a dramatic surge in internet use fuelling economic growth and opening doors to education and public healthcare in previously impoverished rural areas, the middle class is on the rise. According to data from the World Economic Forum, nearly 80% of Indian households will be categorised as middle income by 2030, up from 50% today.

This is indicative of a broader trend across the continent. Current predictions estimate that the total Asian middle class will soon hit three billion. Southeast Asia alone is expected to have 163 million households in the consuming class by 2030, with nations like Indonesia generating tens of millions of new consumers who are both able and willing to spend more.

But while consumerism is on the rise across Asia, the nature of this consumption is changing. While previous generations typically expressed strong preferences for foreign luxury goods and brands, a new generation of ever more discerning consumers are beginning to opt for domestic products over their western equivalents.

Nowhere is this pattern more obvious than in China, as shown by data gathered by McKinsey. Between 2007 and 2017 China nearly tripled its production of labour-intensive goods from $3.1 trillion to $8.8 trillion. However, it only exported 8.3% of its gross output in 2017 compared to 15.5% a decade earlier, indicating that more goods are being sold domestically rather than exported overseas.

Richard Philbin, a wealth manager at Wellian Investment Solutions, recalls witnessing an example of this during a business trip to Shanghai back in 2016. ‘I visited a company called Shanghai Motor , and the chief executive told me that this particular plant produced 500,000 vehicles a year,’ he remembers. ‘So a substantial number. I asked how many they sold abroad, and he replied ‘None. We don’t even export any to the rest of the country. All are sold in Shanghai.’’

Asian markets in general are on track to drive 40% of the world’s consumption by 2040. By the end of this decade, China’s working-age population is predicted to account for 12% per every $1 of worldwide urban consumption.

Already now, more Chinese households are buying products that are prominent in the western world, such as cars, electronics, cosmetics and health insurance. They are also spending increasing amounts on food, vacations, and entertainment. ‘Premiumisation’, or switching to higher-quality brands, is also a big theme, as Chinese consumers are discerning and are increasingly demanding higher‑quality products.

Against this background, it’s little wonder that investors are showing ever more interest in the opportunities present amid this corner of the globe.

‘Rapid productivity growth, rising wealth, and robust domestic demand have all fuelled the China economic “miracle” – and there is still a great deal of relative wealth improvement potential,’ Chris Kushlis, emerging market sovereign analyst at T. Rowe Price, explains. ‘To put this in context, if China’s relative wealth was to converge with US levels, its economy would balloon to roughly four to five times the size of that of the US. The fundamentals underpinning China’s domestic equity and credit markets are compelling.’

Investors are also gaining increased confidence in these economies due to a growing level of regulation which was never present in the past.

‘Deleveraging policies and increased regulation in recent years have imposed new discipline and forced poorer-quality firms out of the market—all of which augurs well for the longer-term stability and growth of the asset class,’ says Sheldon Chan, emerging market credit analyst at T. Rowe Price.

Overall, with such positive tailwinds across emerging markets we don’t expect the consumption boom to end any time soon.

Sign up for Emerging Markets insights from T. Rowe Price