Euromonitor International predicts that in 2020, emerging markets will dominate the top five largest economies. The most symbolic shift will be when China overtakes the USA as the largest economy globally. This Q&A will answer some of the key questions about what our forecasts of the world’s largest economies mean and what implications this will have for global consumer market development. Emerging economies are driving global economic growth but advanced economies will retain a competitive advantage with higher per capita incomes and greater consumer market expenditure, while governments in developing countries face challenges in keeping up with the pace of economic growth.
Euromonitor predicts that the world’s five largest economies in 2020, measured in Purchasing Power Parity terms (PPP) will be:
Source: Euromonitor International Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), International Financial Statistics (IFS)
The three biggest emerging economies will account for around 30.0% of global GDP in PPP terms in 2020 compared to 23.5% in 2012 when there were just two emerging markets amongst the five largest economies (1. USA 2. China 3. India 4. Japan 5. Germany). The most discernible shift in global power towards emerging market economies is expected to take place in 2017 when China will become the world’s largest economy.
The global economic downturn of 2008-2009 and the ensuing sovereign debt crisis have accelerated this trend as advanced economies were hit much harder through greater integration in global financial markets and larger fiscal imbalances and government debt. The consequential austerity drive across much of the developed world, especially in the eurozone, has resulted in low-growth, high-debt scenarios, long-term unemployment and underemployment trends, with a potential “lost generation” amongst the severely hit youth. Economic growth in emerging and developing countries also slowed but the effects of the global downturn were not as acute and in 2013, emerging markets will overtake developed countries in their share of the global economy in PPP terms for the first time (forecast 51.0% of world GDP).
World GDP in PPP terms from Developed Countries and Emerging and Developing Countries: 2000-2020
Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), International Financial Statistics (IFS)
Note: Purchasing power parity (PPP): A method of measuring the relative purchasing power of different countries’ currencies over the same types of goods and services. Because goods and services may cost more in one country than in another, PPP allows us to make more accurate comparisons of standards of living across countries
Why is Purchasing Power Parity terms used?
We have used PPP as this is a method of measuring the relative purchasing power of different countries' currencies over the same types of goods and services, thus allowing a more accurate comparison of living standards. PPP allows for exchange rates to adjust so that different price levels are eliminated. In terms of analysing the size of economies around the world, it allows for a more accurate comparison.
What does this mean for global consumer markets?
As emerging market economies expand, standards of living will improve, poverty declines, and real incomes generally rise, with a corresponding expansion of the global middle class. This will have tremendous implications for global consumer market development:
- Consumer markets are seeing a similar shift towards emerging markets. In global rankings of the largest consumer markets measured by total consumer expenditure in US$ terms, China was the only emerging country in the top five, at third place (behind the USA and Japan). By 2020, Euromonitor forecasts that Brazil will join China in the five largest consumer markets in real US$ terms. Together, these two countries will account for 13.7% of global consumer spending in 2020 but this is still far behind the world’s largest consumer market, the USA, which alone will make up just under a quarter of global consumer expenditure;
- However, in per capita terms, developing market convergence with advanced economies is a long way off with significant gaps in spending power and living standards. Switzerland and Norway will have the largest annual disposable incomes per capita in the world in US$ terms in 2020 at US$56,031 and US$50,567 respectively in real terms. In comparison, China and India, which have much larger population sizes being the most populated countries in the world, will have per capita annual disposable income of just US$5,996 and US$1,856 correspondingly. Yet, both China and India will experience amongst the fastest real growth in both consumer expenditure per capita and annual disposable income per capita in the world over 2013-2020 as their markets develop from a low base.
Top 5 Largest Consumer Markets and their Real per Capita Consumer Expenditure: 2020
Source: Euromonitor International from national statistics/UN/OECD
Note: Figures are in constant 2012 prices, fixed 2012 exchange rates
This contrast means that consumer goods companies and marketers will need to target advanced economies and developing countries with varying strategies and even through alteration in products or services to take into account local purchasing power capabilities. As the middle class grows in developing markets, there will be a greater propensity for discretionary spending outside of the essential categories of food and housing. Yet poverty and low incomes will remain widespread in some countries, so businesses should also consider the “bottom of the pyramid” market. In Indonesia, for example, in 2012 there were 36.7 million households with a disposable income less than US$7,500 – equivalent to almost 60% of households.
How can advanced economies retain competitive advantage?
- Two important drivers of economic growth are population expansion and productivity. Developed economies lack an advantage in population growth owing to the more advanced effects of ageing and shrinking labour forces. However, emerging markets are still benefitting from large, young and growing populations, which contribute to labour market input. As such, populous and expanding developing countries such as India and Indonesia will benefit from their “demographic dividend”. This is when a large proportion of the population are of working age and when the ratio of children is also falling, so that the majority of society are working and contributing to economic growth. In India, 64.5% of the total population were aged 15-64 in 2010 and this will rise to 66.5% by 2020. In Japan, home to the world’s oldest population, 63.8% of the population were aged 15-64 in 2010 and this will fall to 59.2% by 2020, exerting considerable pressure on the labour force, economic growth and government finances;
- Aside from greater incomes and spending power, advanced economies can preserve a competitive edge by increasing their productivity levels to make up for shortfalls in their demographic and labour market growth. Productivity is measured by GDP per person employed and economic growth can therefore be boosted if the output of the existing labour market is increased. This can be achieved in a variety of ways including technological advancements, higher skill levels, wider Internet usage or automation. As emerging markets develop their economies from the primary and secondary sectors of agriculture and manufacturing to the tertiary sector of services, advanced economies, which have already undergone industrialisation, can maintain global competitiveness through higher value goods, services and innovation.
What challenges face emerging market economies?
There remain many obstacles to economic growth in emerging and developing countries:
- Although they can benefit from young and growing populations, this is only an asset if the government or the pace of economic development and reform can keep up with job demand, otherwise it can equally end up being a source of problems and discontent, as seen most recently in the Arab Spring;
- Education and skills are vital to improve human capital, attract foreign direct investment (FDI) inflows and to aid the progression from low-skilled manufacturing to higher value manufacturing, services and technological innovation;
- Infrastructure deficits are a hindrance for business environments in developing countries both in terms of obstructing the ease of the movement of goods and services but also of the labour force. Likewise, a global digital divide persists with emerging markets lagging behind that of advanced economies in ICT and Internet penetration. Greater investment is needed to open up access to Internet and telecommunications services, especially in rural or difficult to reach areas;
- Finally income inequalities will impede full economic growth potential. Out of a ranking of 85 major economies in terms of their Gini Index (a measure of income inequality), Euromonitor figures show that the top 10 most unequal countries were all developing countries in 2012. South Africa topped the list with a score of 63.6 (the higher the number over 0, the higher the inequality, and a score of 100 indicates total inequality) while major developing countries such as China and India are seeing income inequalities rise despite their economic growth.