How the World Shops — and What That Means for Investors
Here’s a first: By 2025, 4.2 billion people out of a global population of 7.9 billion will be part of the consuming class.
That means, for the first time in history, the number of people with discretionary income will exceed the number still struggling to meet basic needs — a phenomenon that may well be the biggest opportunity in the history of capitalism.
From the United States to China, consumer spending, long a driver of the global economy, is undergoing sweeping change. Whether it’s millennials in the U.S. or families in India, a shift in the way people spend money is underway globally.
In 2015, Americans spent more than $11 trillion, accounting for two-thirds of the nation’s gross domestic product. But the way Americans spend money is changing. Since 2000, there has been a rotation in spending away from goods and towards services, especially travel and leisure.
That dynamic may also be at work in China, as the country continues on the path to having the world’s largest consumer economy. Consumers there are starting to spend less money on necessities and more money on activities such as family trips and going to the movies.
Demographics will have a major impact on the future of the global economy, particularly due to the aging of millennials, who were born from 1980 to 2000. There are about 80 million in the U.S., but most of the world’s 2 billion millennials are living in emerging markets. In Brazil, India and China, they outnumber baby boomers.
Globally, millennials are estimated to have a combined spending power of nearly $2.5 trillion. They are about to reach their prime working and spending years, and their impact on the world’s economy could be huge.
Here’s a look at some of the ways people are spending money globally, and what it may mean for investors.
In China, Shopping is About the Experience
Chinese Consumers Are Expected to Spend $3.6 Trillion This Year
Never underestimate the power of the Chinese consumer. Complex and unpredictable, the 1 billion consumers in China are not exactly clinging to their yuan.
Despite a relatively sluggish economy, the Chinese are projected to spend $3.6 trillion this year, or double what they spent in 2006. They are also expected to increase their spending by 10% a year through the end of the decade. They are not just filling the basket with consumer staples — for some, shopping is about the experience.
Going to the movies and taking family trips abroad have become part of Chinese life. China’s box office revenue is projected to reach $8.4 billion in 2016, and grow to $15 billion in 2020. What Hollywood movie has made the most money in China? Furious 7 took in $391 million at the box office last year.
More than 70 million Chinese tourists spent $292 billion on outbound travel in 2015, or nearly three times the level in 2012. Many of those trips are booked through Ctrip, an online travel firm partly owned by Priceline and Baidu, the Chinese internet search giant. The surge in Chinese outbound travel is a multidecade theme driving structural growth in the airline, gaming and internet industries.
“What we are seeing is that the Chinese are primarily spending their money online, on lifestyle and on experiences,” Capital Group’s China affairs specialist, Andrew Dougherty, says. “From an investment standpoint, these are secular opportunities worth paying attention to. China is the largest e-commerce market in the world and is still growing by double digits.”
India May Be an Economic Powerhouse in the Making
The Country May Still Be on the Ground Level as a Consumer Society
India embarked on a journey about 25 years ago, opening its doors to globalization and world markets. Since then, the country has become one of the most important components of the global economy, as India’s growth has overtaken that of fellow Asian giant China.
One of the key components of the country’s economic growth is brisk consumer spending, which propelled growth in India’s economy to 7.6% as of March 31, the end of the country’s fiscal year — the fastest pace in at least four years.
When it comes to being an economic powerhouse, India may just be getting started. The graphic shows that the country still lags much of the world in having items such as refrigerators and air conditioners.
But modernization is progressing at a relatively rapid rate, both in terms of personal consumption and modernizing infrastructure. Under Prime Minister Narendra Modi, highways, airports and railways are being improved, which could provide opportunities for companies and boost the economy.
India also stands to benefit from a demographic tailwind during the coming decades. India has about 440 million millennials and 390 million members of Gen Z (individuals born after 2000) that make up its 1.3 billion population. Over the next decade, about 150 million new people will enter India’s workforce. That’s about the present size of the entire U.S. labor force. A swelling workforce makes it likely India will continue to be a massive market for consumer companies and a major economic power.
“India has a lot going for it in terms of favorable demographics, the possibility of a downward trend in inflation and a substantial reform agenda. If reforms are forthcoming, its economy could really take off, similar to the way China’s did,” Capital Group portfolio manager Nick Grace says.
Millennials: Aren’t They About Ready to Start Buying … Everything?
Collaborative and Disruptive, Millennials Are Beginning to Flex Their Financial Muscles
Talk about pent-up demand. Millennials have been battered by the Great Recession, swamped with student debt and stuck in their parents’ basements for years. They’ve put off getting married, having kids and buying a car, much less a house. But those days may be coming to an end.
In fact, the members of the biggest generation in U.S. history may be about ready to flex their financial muscles. There are about 80 million millennials in the U.S. alone, and they are already spending at least $600 billion a year.
Millennials are also taking a collaborative and disruptive approach to consumption. Technology has made sharing assets relatively inexpensive and possible on a large scale.
In this sharing economy, people rent rooms, cars or luxury purses directly from each other via the internet. Some companies facilitating this collaborative consumption now have multibillion-dollar market caps, including Airbnb, Uber and HomeAway. By 2025, according to consulting firm PricewaterhouseCoopers, the sharing economy may account for $335 billion in global spending.
While millennials are already a potent force, they will truly come into their own by 2020, when their spending in the United States is expected to reach $1.4 trillion annually. Some of that money may go to purchases that have been put off in the wake of the Great Recession.
As millennials enter their peak home-buying years, for example, their reluctance to enter the housing market could change. The cohort’s size, plus its desire to settle down in the future, could lead to a surge in household formations and home sales.