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  • Growth of Working Age Population Makes Emerging Markets Across Africa Promising Growth Zones

    The next regional boom may very well be across emerging markets in Africa. Optimism for the region comes less from any one sector success story, and more from looking at demographic shifts. In a report for the McKinsey & Company , Damian Hattingh , Bill Russo , Ade Sun-Basorun , and Arend Van Warmelen (all of the McKinsey Johannesburg office) write that Africa will "account for more than 40 percent of global population growth to 2030." And in a couple of decades, the working age population across the continent will have fewer responsibilities for other family members, according to the report, making them eligible producers and buyers of consumer goods. From the report: Thanks to declining fertility rates, it is the working-age population that will have the highest growth rate. (In fact, by 2040, Africa’s working-age population is forecast to surpass China’s.8 ) As a result, Africa is expected to experience a dramatic decline in its dependency ratio—the number of children and the elderly supported by each worker (Exhibit 1). This development will contribute to continued increases in GDP per capita in the next decades and comes at a time when dependency ratios in virtually every other region of the world are increasing, with negative implications for GDP growth in those areas. Africa also has the world’s youngest population—more than half its inhabitants are under 20 years old, compared with only 28 percent in China. Among the residents we surveyed in urban centers, we found that the 16-to-34 age group already accounts for 53 percent of income. And the consumption habits of youth are quite different from those of their elders; younger people in Africa, for example, are more likely to search for information online (67 percent of 16-to-24- year-olds are online, compared with 32 percent of the 45-and- older group) and to seek products and stores that reflect the “right image.” They are more brand conscious, follow the latest fashion and trends (53 percent versus 33 percent), and say they are typically one of the first people they know to try new things (44 percent versus 28 percent). They are also more educated, with 40 percent having completed high school, compared with only 27 percent of the 45-and-older group. These qualities point to a major change in consumption habits as this cohort ages, its incomes increase, and its behaviors and decision criteria become the societal norm. By 2020, more than half of African households are projected to have discretionary income, rising from 85 million households today to almost 130 million in 2020.9 Africans share the optimism of that economic forecast: 84 percent of those we surveyed said they expect their households to be better off in two years (Exhibit 2). Sub- Saharan Africans are the most optimistic—97 percent of Ghanaians, for example, said they will be much better off in two years. North Africans, on the other hand, are generally less optimistic about the future, with only 10 to 15 percent of respondents saying they will be much better off in two years, which is unsurprising given the uncertainty generated by recent political turmoil in the region. Overall, consumers are increasing spending across most categories. Up to 30 percent of more optimistic consumers in some countries say they are buying more frequently and purchasing new and more expensive products, although inflation may also be a factor in buying behavior. Read the full report here .
  • McKinsey Quarterly: Reaching New Consumers in Emerging Markets Requires Focus on Value

    With the rising consumer classes in the BRIC countries and other emerging markets, global manufacturers have an opportunity to see significant growth in the coming years. But only if they make value a key focus, according to McKinsey analysts Ananth Narayanan , Asutosh Padhi , and Jim Williams . At McKinsey Quarterly , Narayanan, Padhi, and Williams share a couple of case studies to make their point: A rising tide of prosperity in developing economies is reshaping the nature of competition among global product makers, offering both the promise of new markets and the perils of having to face nimble, innovative, and highly ambitious rivals. In fact, the speed of newcomers (unencumbered by legacy issues) makes still more problematic an insidious challenge large manufacturers everywhere face when they try to innovate: insular thinking and functional disconnectedness that, if unchecked, can gum up product-development processes, drive up costs, and distract companies from paying attention to competitors—and, ultimately, customers. Recognizing the challenges of the new environment, a few product makers in industries as varied as appliances, automotive, consumer packaged goods, high tech, and medical devices are taking a different approach. By encouraging more focused collaboration among multiple functional groups (notably marketing and sales, operations, engineering/R&D, and procurement), these leaders are combining deep insights about customers, competitors, and supply bases to strip out costs and amplify what customers truly value. The results—including better products, happier customers, higher margins, and, ultimately, a stronger ability to innovate—should serve these organizations well in years to come. Though the authors don't use the term "user centered design," they do seem to be arguing that it is an important step toward success. They outline the need to value the customer with the following exhibit: Read Designing products for value here .
  • McKinsey Quarterly: Word-of-Mouth and Reaching the Rising Consumer Class in Emerging Markets

    As global companies work to connect with consumers in emerging economies, they have to be more cognizant of different buyer behavior in countries like India and Brazil. At McKinsey Quarterly , Yuval Atsmon , Jean-Frederic Kuentz , and Jeongmin Seong point to a few areas where these companies may need to shift their approach. The emerging consumer classes in the BRIC nations, for example, are influenced much more widely, the author's argue, by word of mouth: An important explanation for word of mouth’s outsized role is that in a land of consumer “firsts”—more than 60 percent of Chinese auto purchasers are buying their first car, and the comparable figure for laptops is 30 to 40 percent—few brands have been around long enough to ensure loyalty. Seeing a friend use a product is reassuring. Indeed, the less a consumer knows about a product and the more conspicuous the choice, the more the consumer is likely to care about the opinions of others. “The more people I know who are using a product,” consumers reason, “the more confident I can be that it will not fall apart, malfunction, or otherwise embarrass me.” The presence (or absence) of that confidence shapes the group of brands that consumers choose to evaluate. It is particularly influenced by the postpurchase experience of friends and family, along with their loyalty to a brand. Often, word of mouth is a local phenomenon in emerging markets, partly because of the simple reality that emerging-market consumers generally live close to friends and family. In addition, word of mouth’s digital forms, which transcend geography and are growing rapidly in emerging markets, still have more limited reach and credibility there than in developed ones. According to our annual survey of Chinese consumers, just 53 percent found online recommendations credible—a far cry from the 93 percent who trusted recommendations from friends and family. That same survey showed that only 23 percent of Chinese consumers acquired information from the Internet about products they bought. For food, beverage, and consumer electronics consumers in the United States and the United Kingdom, that figure is around 60 percent. Word of mouth’s relatively local nature means that companies in emerging markets are likely to reap higher returns if they pursue a strategy of geographic focus than if they spread marketing resources around thinly (targeting all big cities nationwide, for example). By attaining substantial market share in a cluster of cities in close proximity, a company can unleash a virtuous cycle: once a brand reaches a tipping point—usually at least a 10 to 15 percent market share—word of mouth from additional users quickly boosts its reputation, helping it to win yet more market share, without necessarily requiring higher marketing expenditures. The authors go on to outline two other key factors in emerging market consumers' behavior. Here is a look at how they interact: Read Building brands in emerging markets here .
  • Liquor Maker Diageo's Two Paths to Profit: Recovering U.S. and Emerging Economies

    Last year, Scotch sales got a surprising lift from consumers in Brazil, India and China . And now it appears some other liquors are reaping similar benefits. UK-based Diageo reported a 6% jump in U.S. sales yesterday. But Dow Jones 's Simon Zekaria reports that the liquor maker's growth has been fueled by rising sales in emerging economies along with the U.S. recovery:
  • McKinsey Quarterly: The Consuming Class in Emerging Markets to Reach 4.2 Billion People by 2025

    McKinsey analysts are calling it the $30 trillion decathlon. That is their projection for the total annual consumption in emerging markets by 2025. And they say the key for global business leaders this century is to figure out how to connect with the burgeoning new consumer class in these markets--and soon. Here's a look at the figures: From McKinsey Quarterly: For centuries, less than 1 percent of the world’s population enjoyed sufficient income to spend it on anything beyond basic daily needs. As recently as 1990, the number of people earning more than $10 a day,1 the level at which households can contemplate discretionary purchases of products such as refrigerators or televisions, was around one billion, out of a total world population of roughly five billion. The vast majority of those consumers were based in developed countries in North America, Western Europe, or Japan. But over the past two decades, the urbanization of emerging markets—supported by long-term trends such as the integration of peripheral nations into the global economy, the removal of trade barriers, and the spread of market-oriented economic policies—has powered growth in emerging economies and more than doubled the ranks of the consuming class, to 2.4 billion people. By 2025, MGI research suggests, that number will nearly double again, to 4.2 billion consumers out of a global population of 7.9 billion people.2 For the first time in world history, the number of people in the consuming class will exceed the number still struggling to meet their most basic needs. By 2025, MGI estimates, annual consumption in emerging markets will rise to $30 trillion, up from $12 trillion in 2010, and account for nearly 50 percent of the world’s total, up from 32 percent in 2010 (Exhibit 2).3 As a result, emerging-market consumers will become the dominant force in the global economy. In 15 years’ time, almost 60 percent of the roughly one billion households with earnings greater than $20,000 a year4 will live in the developing world. In many product categories, such as white goods and electronics, emerging-market consumers will account for the overwhelming majority of global demand. China already has overtaken the United States as the world’s largest market for auto sales. Even under the most pessimistic scenarios for global growth, emerging markets are likely to outperform developed economies significantly for decades. Read Winning the $30 trillion decathlon: Going for gold in emerging markets here .
  • The Earth's Economic Center of Gravity is Shifting: McKinsey Global Institute Report on Rising Cities and Consumer Class Growth in Emerging Markets

    Global economic growth over the next decade will be driven largely by growing cities in emerging economies, according to a fascinating new report from the McKinsey Global Institute , titled Urban world: Cities and the rise of the consuming class . Of the 600 cities that the report cites as the most important drivers of the global economy, 440 are in emerging economies. And while McKinsey Global projects the "City 600" will account for 65% of global growth by 2025--rising some $30 trillion over that span--the 440 cities in emerging economies will account for nearly half of all global growth on their own. Also, the report projects that we will see 1 billion new consumers from these 440 cities. McKinsey Global calls this development "the most significant shift in the earth’s economic center of gravity in history." From the report: The incomes of these new consuming classes are rising even faster than the number of individuals in the consuming classes. This means that many products and services are hitting take-off points at which their consumption rises swiftly and steeply. By 2025, urban consumers are likely to inject around $20 trillion a year in additional spending into the world economy. Catering to the burgeoning urban consumer classes will also require a boom in the construction of buildings and infrastructure. We estimate that cities will need annual physical capital investment to more than double from nearly $10 trillion today to more than $20 trillion by 2025, the lion’s share of which will be in the emerging world. This huge sum of consumption and investment could inject more than $30 trillion of annual spending into the world economy by 2025—a powerful and welcome boost to global economic growth. But there will be challenges, too. Rapidly urbanizing emerging economies and their increasingly wealthy consumers are already driving strong demand for the world’s natural and capital resources. The global investment rate and resource prices have jumped and could rise further. Cities can be part of the solution to such stresses, as concentrated population centers can be more productive in their resource use than areas that are more sparsely populated. But if cities fail to invest in a way that keeps abreast of the rising needs of their growing populations, they may lock in inefficient, costly practices that will become constraints to sustained growth later on. How countries and cities meet this rising urban demand therefore matters a great deal. Beyond the direct impact of the investment, their choices will have broad effects on global demand for resources, capital investment, and labor market outcomes. Read the full report here . You can also explore the City 600 and the economic of cities globally with a new interactive map from the McKinsey Global Institute. Click here .
  • The Challenges of a Rising Global Middle Class

    One of the great positive global economic stories of the young 21st century--perhaps the top story--is the rapidly rising middle class in developing nations across the globe, especially in South America and Asia. But Johannes Jütting ,Head of Poverty Reduction at the OECD Development Center in Paris, warns us not to overlook the challenges that a burgeoning new middle class bring to nations and the global economy. Writing at Project Syndicate , Jütting argues that the middle class's "dreams" can become "nightmares" if policymakers get complacent and overlook the structural challenges that they must face: In today’s shifting world, with GDP in roughly 80 developing economies rising at twice the rate of per capita growth in the OECD, the club of the world’s richest countries, middle-class citizens paradoxically complain and protest regardless of whether fortunes improve or decline. Moises Naim, a former Venezuelan minister of trade and industry, even warns of a possible “emerging global war of the middle-classes.” While anger over pay cuts and unemployment make sense, it is harder to understand the current protests in fast-growing countries like Thailand and Chile, where standards of living are improving. What is going on? High growth in Asian and southern countries has meant greater export earnings and rents from natural resources. Unfortunately, this blessing can turn into a curse. In China, former Communist leader Deng Xiaoping’s vision – “let some people get rich first” – has led to impressive economic growth and poverty reduction; but it has also undermined the self-proclaimed “harmonious society,” as recent protests and labor conflicts indicate. Indeed, it is telling that, in the spring of 2011, Beijing’s municipal authorities banned all outdoor luxury-goods advertisements on the grounds that they might contribute to a “politically unhealthy environment.” Rising inequality, lack of civic participation, political apathy, and a dearth of good jobs, particularly for the young, comprise the Achilles heel of emerging-market countries’ current development model. A Gallup poll on subjective well-being in Tunisia and Thailand shows that, while income levels and social conditions in both countries improved between 2006 and 2010, life satisfaction dropped. Read The Middle Class Goes Global here .
  • Brazil's Staggering Growth Rate: 19 New 'Millionaires' Per Day

    As developed nations in Europe and the US have struggled to keep from slipping into recession, Brazil's economy has, for the most part, continued to gain strength. One sign of growth in Brazil is the increasing number of wealthy Brazilians. At Forbes , Ivan Castano reports that Brazil's population of millionaires is now growing at a rate of 19 per day: Individuals with a net worth ranging from $539,000 – $2.7 million ($1m-$5m reais) make up the bulk of the new millionaires, [Guilhermo] Morales said, adding that most private banks tend to individuals whose net worth falls below $5.4 million ($10m reais). “I think that this trend will continue for the next three years but I don’t see it lasting forever. After all, there is a limit to everything,” Morales noted. Brazil’s economy has been growing at an annual average of 5% in recent years and is predicted to maintain that pace in the medium term. However, some economists have warned that the country’s economy could overheat as inflation rises to unsustainable levels. The 19-millionaires-a-day statistic was measured by taking all of an individual’s wealth into account, including investments, property, savings and other assets in addition to cash. Some in the private banking conference said the statistic seemed a bit overhyped but Emerson Pieri, Head of Wealth Management, Latin America, at Haliwell Bank (which unveiled the millionaire statistics as part of a Brazilian wealth management study) insisted they are reliable. Read Brazil's Booming Economy Is Creating 19 'Millionaires' Every Day here .