Today we see markets rise and fall based on the latest earnings reports, employment figures and fiscal news out of Washington. As the world’s largest economy, what happens here is felt around the world. But will the U.S. retain its status as global leader given our current state of affairs? What will the global economy look like in 20 years? Many economists believe this transformation is reason to be optimistic about the long-term potential of the global economy.
Rise of middle class spenders. During the next two decades, majorities of people in most countries will rise in economic status to the ranks of the middle class — a group defined as consumers with sufficient income for necessities and discretionary purchases. About 1.8 billion strong in 2012, the global middle class will swell to nearly 5 billion consumers with an estimated spending power of $56 trillion a year. While it took Britain 155 years and the United States about 30 years to double GDP per capita, China and India are accomplishing the feat at a pace never seen. With 100 times the people of Britain, it has taken just a tenth of the time. As a result, these emerging countries are seeing an explosion in the number of people with income to afford luxuries of the middle class.
Economic/market impact. Clearly, this broad expansion of a middle class with money to spend presents a lucrative opportunity for multinational corporations. Businesses in advanced countries are already competing for the chance to sell their products directly to this rising demographic. With income to spare, members of the emerging global middle class will focus on elevating their standard of living. Their spending habits are likely to increase demand for a wide range of consumer goods. Demand will grow for the machines, software and business services to meet the needs of their burgeoning middle-class populations.
Challenges to overcome. The global middle-class has far less discretionary income than in the U.S. In China and India, consumers spend about 40 percent of household income on food and transportation, compared with 25 percent in the U.S. To compete, U.S. companies must find innovative ways to make products more affordable in developing economies. Brands must appeal to ethnic tastes, using local ingredients and resources, and companies must understand and market to consumers with different cultural motivations and needs. Establishing distribution channels to reach some global consumers may present significant challenges. Roads, airports and infrastructure remains underdeveloped in many emerging nations. Government regulations may restrict access or slow entry into some foreign markets.
Contact your agent to capitalize on the global growth of the middle class based on your investment goals and risk profile.
Sources: 1) “Global Trends 2030: Alternative Worlds,” National Intelligence Council, December 2012. 2) Karen Mracek, “Middle-class Spenders Will Lead Global Growth,” Kiplinger, Aug. 6, 2012. 3) “The Emerging-World Consumer is King,” The Economist, Jan. 5, 2013. 4) Michael J. Silverstein, “A $10 Trillion Bet on China and India,” Nov. 28, 2012. 5) “The New Global Middle Class: Potentially Profitable – but also Unpredictable,” Knowledge@Wharton, July 9, 2008. 6) Tom Doctoroff.
Information provided by Timothy J. Heisterkamp, CFP®, Investment Centers of America, 115 W. State St. Jefferson; 515-386-2570.