Wednesday, February 5, 2014

Asia: Who’s Consuming?

Consumption is the bread-and-butter driver of any economy, including Asia’s. Even with China’s notoriously high investment rate, consumption comprises 45% of Asia-10’s GDP, compared to 40% for investment. In most countries, consumption comprises a far higher proportion. More than anything else, where consumption goes determines where the rest of the economy goes – especially today with China trying to put more weight on the consumer foot.

Asia’s consumption baskets are also changing every-which-way – as would be expected given the region’s rapid growth and huge variation in income levels. In general though, health care, recreation and education expenditures are taking a bigger share of household income while food and housing comprise a smaller part of the basket. Rising incomes allow Asians to spend more on things they want and less on things they need.

Looking back, consumption in Asia has managed to plow through the biggest global downturn in a century without help from either the US, Europe or Japan. In the five years since Lehman, Asia’s consumption has grown by nearly 38%, an average compound rate of 6.6% per year. In the US, it’s grown by a total of 7.5% over five years. Meanwhile, Europe’s consumption today is still 1.5% below where it was in September 2008.

Consumption in Asia has grown by nearly half a trillion dollars over the past five years, or $477 billion to be exact, which is 2.3 times more than what the US consumption has grown by. Put differently, for every dollar of new consumption the US puts on the table over the past five years, Asia puts up $2.30. For every dollar Japan puts on the table, Asia added ten more. Overall, Asia’s consumers are driving global growth today by a factor of 2.3 to 10.

Within Asia, consumption is seeing the fastest growth in China and Malaysia, followed by the Philippines and Indonesia. Real (inflation-adjusted) retail sales growth in China is running at nearly 12% per year. Total consumption growth (data for which is available only annually), is probably running at an 8%-8.5% pace, given historical differences between the two series and current GDP growth of 7.6%-7.8%. Even so, that’s four times faster than the US’ consumption growth.

In Malaysia, real consumption growth has averaged 7.7% on-year for the past two quarters. The Philippines and Indonesia are not far behind at 5.7% and 5.3%, respectively. Hong Kong and Singapore occupy the middle ground with real growth near 3% – roughly what would be expected given their high income levels. Meanwhile, the standouts on the low end are India and Thailand. Both countries have run into economic and political difficulties of late that threaten the outlook if upcoming elections do not bring clearer or stronger mandates to economic policy.

When it comes to actual dollars or growth, however, China remains the undisputed leader. Of the $477 billion of new consumer demand that Asia generated since Lehman collapsed five years ago, China has accounted for $317 billion, or 66% of it. While there has been a lot of new demand generated in Asia outside of China, in relative terms, China has maintained its dominance and will only grow more dominant in the years to come.