Where will demand come from to sustain economic recovery? You look around the world and the picture does appear rather bleak. The US consumer is still ground down by debt, as indeed are our own consumers. Our Government is setting out on an austerity programme, as indeed is most of the eurozone, and the US will surely have to correct its federal deficit, as the individual states are already being forced to do.
German consumers are notoriously cautious, as are the Japanese. Everyone hopes growth will come from exports but you have to have someone on the other end doing the importing. Can the emerging world, which has been supplying most of the incremental demand over the past three years, really keep it up? There is a further complication. To oversimplify, much of the import demand from China and India has been for raw materials, which is fine for Australia and Canada but does not help the rest of us much. Sure, there is plenty of demand for luxury products, BMWs and top-end Bordeaux, but that is not enough to pull the West out of the hole it has dug for itself.
In any case, demand in China has been sustained by top-down infrastructure projects and by a building boom, both of which seem now to be being reined back. Ultimately, demand will have to be sustained by rising consumption in the emerging world, but to date there seems to be only limited evidence of that. In the past few days, however, a few things have cropped up that have made me rethink this view. One is the new China fund run by Anthony Bolton, the legendary fund manager at Fidelity, who has moved to Hong Kong to set it up. He announced yesterday that his key sector investments would be with companies driven by consumer spending.
That is interesting, because up to now consumption has accounted for a very small amount of total demand: less than 40 per cent compared with the 60-70 per cent in most of the West. Instead, much of the demand in the country has come from capital spending, home construction and the like.
Another were some remarks at a seminar of Trusted Sources earlier this week, where it was pointed out that Chinese consumption was now growing and this might replace investment demand. Investment opportunities might now be in companies selling finished goods to China, rather than raw materials. A third has been a growing awareness of the importance of what Goldman Sachs has dubbed the "next 11", the next countries after the Brazil-Russia-India-China (BRIC) group in terms of size of economy. These include giants such as Indonesia and that other great, if troubled, country in the Indian sub-continent, Pakistan.
I had not appreciated until this week that back in 1990 Pakistan had a higher GDP per head than India; now, thanks to the Indian financial and market reforms of the 1990s, it is lower. That is inevitably leading to an "if they can do it, why can't we?" attitude in Pakistan, as a senior official there told me this week.
To put some numbers on to all this I have been looking again at the work by Goldman Sachs a couple of years ago on the expanding world middle class (Global Economics Paper: 170). By middle class, Goldman means people with incomes of between $6,000 (£3,900) and $30,000 at purchasing power parity exchange rates. So, not really rich, but just reaching the band where people spend a lot on acquiring a mass of consumer durables.
Think back. When did your family get its first car? The 1930s, or more probably the 1950s or 1960s. That was when the explosion of demand took place, for now the car market has become a replacement one. That's why China has passed the US to become the world's largest car market, despite the fact GDP per head remains much lower. Or, to take a product lower down the cost scale, out of the top five markets in the world, four are the BRIC countries, with the US at No 2, behind China.
There is also evidence of great innovation in consumer products. The Tata Nano has revolutionised the concept of the car in India in much the same way as the Ford Model T and VW Beetle did so generations earlier in the US and Europe, when we were at a similar level of GDP per head. The graphs opposite pick up this theme. At the top, you can see the way in which middle-income countries will come to dominate the world economy, accounting for more than half of global GDP by 2050, as against less than one-third now.
Next, you can see how this new middle class is rising first in China, then in India – the decline in China coming partly from the fact that more and more of the population will move up and out of this middle class into the more affluent group, with incomes above $30,000 a head, and partly because of the ageing of its population.
As people get older they spend more on services and less on products. At the bottom you can see the projections both for the total size of the economy and for GDP per head in 2050. It shows that not only will China have become the world's largest economy by a huge margin but the US will be about to be pushed into third place behind India. While in GDP-per-head terms the US will, on these calculations, remain the richest country in the world, followed (and you may find this surprising) by the UK, the big demand for consumer items will come from somewhat less rich countries with bigger populations. Now, all this is about the world a decade or more hence. But the process has begun.
This next economic cycle will be the first to be driven by demand in the BRICs and the Next 11, rather than by demand in the old, developed world. This is a change so profound that it is quite hard to get one's head around it.
Most of us still look at the world economy through the prism of the West; how could we not? So, we look at US consumer indebtedness, or the plight of the eurozone, or our own fiscal catastrophe.
We then suck our teeth at the consequences of all this for the growth phase of this cycle.
But I am unsure that this is the right way to look at the next few years, either during the expansionary period or during the inevitable next recession that we should sensibly expect to commence some time between 2016 and 2020.
It might be quite a good growth period for the world as a whole, and even for the indebted nations of the West. It is just that, from our perspective, not much of that growth will go into improving living standards; it will go into paying off debt. It makes no sense to try to predict the shape and nature of the recovery with any precision. But it does seem to me sensible to assert that rising consumer demand in the emerging world will become an increasingly important contributor to overall growth, and that this is an opportunity as well as a challenge.Reuse content