The Roar of the Asian Economy: Consumption growth is set to make Asia the economic centre of the world

In a two-part series, the Warwick Economics Summit explores how Asia is set to transform the world over the course of the next decade. Primarily using research from McKinsey, we discuss how changing consumption, trade and business patterns are set to reshape the global economy, and how the might of the Asian consumer is pulling the centre of economic gravity towards them.

The economic centre of power is shifting, that much is accepted. But in the second part of the series, we wonder if the political power will shift as well, most notably the tango of values between the United States and China. It might be the case that the economic engine of the world is the East, but the political driver may very well be the West. 

In the turn of the 21st century, Asia only made up 33 percent of global GDP, but by 2040 it is on track to surpass 50 percent. For years now, observers have predicted a roaring Asian economy will soon join the world in equal footing, and they are right. Business leaders and politicians are now looking eastward, as the might of the Asian consumer is pulling the centre of economic gravity towards them. We see this through changing patterns of trade and consumer demand, as well as increasingly profitable business opportunities in the region. 

Propelling 1.2 billion people out of poverty and into the consuming class is one of the greatest economic stories in history, and it is a story told by Asia. Research from McKinsey projects that Asia will contribute more than 50% to all consumption growth over the next decade. The growing Asian middle class will soon be 3 billion strong, the research notes, with Southeast Asia alone adding 80 million to that number. This number is expected to double by 2030, even as the birth rate falls across the Asian region. 

China’s working-age population is touted to be a major demographic group to generate a large share of urban consumption growth through 2030. These individuals are more optimistic about their future and are willing to spend a greater share of their disposable income than previous generations, McKinsey explains, and are more willing to pay a premium for new and innovative technological products. A quality education, most likely in the United States, will take the lion’s share of consumer spending – 12.5 percent of all consumption growth. Most notably, the wealthy Chinese consumer has expensive taste. In 2018, around 30 million Chinese consumers accounted for one-third of global spending on luxury goods and are projected to double by 2025. 

Recently, figures in international trade between the East and the West warrants an interesting observation. Global output is rising in both regions, but the share of goods traded across borders fallen by 5.6 percentage points. In another research from McKinsey, it notes that China nearly tripled its production of labour-intensive goods from $3.1 trillion to $8.8 trillion over the decade of 2007 to 2017. But yet, the share of exports in China’s gross output has dramatically decreased from 15.5 percent to 8.3 percent. 

This decline, McKinsey explains, does not indicate that a slowdown is on the horizon or reflective of protectionist measures, but it shows that production in Asia is now redirected to local consumption rather than being exported to the West. In addition, many Asian economies are becoming increasingly less reliant on foreign imports of final goods as they themselves possessed new industrial capabilities. As evidence, only 18 percent of goods traded involves exports from low wage countries to high wage countries in recent times. 

While global trade in goods slows down, trade in services across the world is growing remarkably – 60 percent faster than the trade in goods. Increased trade in services has always been touted as a good indicator of a country’s journey from a developing to a developed state, and we see that service flows in Asia have grown 1.7 times faster than the rest of the world. In India, software services companies such as Tata Consulting and Infosys have joined traditional business giants in the oil or steel industry to be some of India’s most profitable companies. 

Businesses in Asia are on the rise, where more than 40 percent of the world’s 5000 largest companies Asian. One major difference between large Asian and Western firms is that many Asian companies are state-owned or controlled by a family, compared to public firms in the West that answers to shareholders every quarter. 

This distinction means that Western public companies are more pressured to maximise earnings in the short to medium term, while state-owned Asian companies have the leeway to take a longer-term view when stimulating growth and promoting sustainability. When the government gives proper support to these companies, it does not mean that competition is weak, but often the opposite, as government support is conditional on high-performance results, giving these companies an incentive to perform well. 

McKinsey identifies high-performing “superstar” firms, which is a set of firms that capture a greater share of income and are pulling away from their contemporaries. Asia accounts for 30 percent of all global superstar firms, up from 15 percent in the 1990s. In the decade since 2007, economic profit produced by these superstar Asian firms increased by 57 percent, in comparison to 33 percent in North America. 

Profitable business opportunities, driven by robust consumption growth, is set to make Asia the centre of economic might, and the world is clamouring to be a part of that growth. While economic power is shifting eastwards, we wonder if political power will shift as well, most notably the tango of values between the United States and China. It might be the case that the economic engine of the world is in the East, but the political driver may very well be the West. In the next part of our series, we seek to explore just that. 

Christopher Lim

Source

https://www.globaldatabase.com/top-50-companies-in-uk-by-revenue-in-2017

https://www.fortuneindia.com/fortune-500?year=2018

https://www.mckinsey.com/featured-insights/asia-pacific/how-asias-rise-is-reshaping-the-world

https://www.mckinsey.com/featured-insights/future-of-asia

https://www.mckinsey.com/featured-insights/asia-pacific/the-global-forces-altering-asias-future

https://wolfstreet.com/2019/07/01/us-dollar-status-as-global-reserve-currency-q1-2019/

https://www.bloomberg.com/news/articles/2019-07-18/the-u-s-dollar-is-unlikely-to-lose-its-top-spot-to-libra-or-the-yuan

https://www.moneycontrol.com/stocks/marketinfo/netprofit/bse/index.html

https://ftalphaville.ft.com/2018/09/19/1537329600000/China-s-currency-will-not-replace-the-US-dollar/

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Blog at WordPress.com.

Up ↑

%d bloggers like this: