Forecasting is always accompanied by uncertainty. The further away you get from the current time period, the greater the uncertainty. These two statements hold true for virtually all areas of forecasting, with one exception: demographics. The reason for this? Barring truly unforeseeable catastrophes - major wars, an asteroid strike, a decades-long, major flare-up of the sun, epidemics, all the unknown unknowables - the children of today will be the adults of the future, and we already know the children of today. Hence, demography drives long-term economic development with a vengeance, and understanding both economic and demographic developments is key to understanding who will be buying what, where and when in the future.
My colleagues at CSM have asked me to take a look at the period from 2030 - a "mere" 22 years from now - to 2050 and tell the story of economic and demographic development in key countries - what it will mean for the consumers of the long-term tomorrow. We at Feri Rating & Research cover 63 countries in our developing Cohorts project, and obviously these all can't be covered here in detail. Let's just talk about the winners of both economic and demographic development over the longer-term period, concentrating on who will benefit the most from these developments.
Put simply, the winners are those countries that are currently expanding output strongly and whose economic growth exceeds population growth by a significant factor. While their output is expected to slow over the long term - no one expects China to continue with an average growth of 9% per year for the next 25 years, least of all the Chinese - demographics are such that countries like Brazil, China and India are developing a very large middle class that will enjoy some of the greatest advances in purchasing power that the world has seen since the boom days of the industrialized West in the 1950s and 1960s. Other nations, such as Russia and most of Europe, will see their populations decline dramatically (for a multitude of reasons) over the long term, even as their economies continue to grow. While these latter countries decline in absolute terms, their per-capita purchasing power grows dramatically, making them very attractive markets for high-end consumer products. What about the United States?
Developments here reflect a unique mixture of third-world demographics - a relatively large number of children and low median age - coupled with first-world economic growth (and incomes!), which lead to the equivalent of a perfect wave for future consumers: Strong population growth, coupled with strong economic growth, results in the development of what will probably be the dream generation for the consumer-goods industry. The future U.S. middle class will not only have the income but will also be the largest of its kind in history.
There will also be losers - those countries where population growth outstrips economic growth. This is, however, only one side of the picture: It is also a question of distribution in many countries, where the value added in economic growth ends up in the hands of the relative few. This is the quandary facing some of the demographically challenged countries as well: While average incomes here may increase sharply, income is not distributed according to an average, and hence the ways that income and consumption are distributed is key.
Why income distribution matters Feri forecasts distribution of income based on our forecast of the supply side of the economy: We cover well over 100 industries that range from agriculture to personal services and have calculated average wages for more than 400 industries, upon which we base our distribution analysis. From these wages, we also have transfer effects, largely favoring lower-income groups, and wealth effects, generally favoring higher-income groups, giving us something fairly unique: an empirically based Lorenz curve of income distribution. This gives us, with some additional analysis, an empirical Modigliani curve, the life cycle consumption of an entire generation from the age of 1 to 100 years of age and older. Our normal forecast period ends in 2018, but we have extended the long-term trend forecast out to 2050 for the purposes of analyzing what the next generation of consumers will have in terms of purchasing power.
Looking at a select group of 23 countries, we can see the effects of different long-term per-capita average growth rates for consumption. There are some surprises here: Bulgaria and Russia with the strongest per-capita growth rates? Population decline is the explanation here, with almost 3 million fewer Bulgarians, and even a moderately expanding economy leads to very strong per-capita growth rates. The same is even more true for Russia, with a decline of almost 35 million Russians from 2000 to 2050. These declines are, barring war, famine and pestilence, unprecedented in world history. India is otherwise the clear leader in terms of growth, with China just barely over the worldwide average, reflecting at this point the maturing of the Chinese economy and dramatically slowing population growth. As the Indian economy is more inward-oriented, robust population growth here results in a significantly longer-termed period of strong growth for India, as opposed to export-led growth for China. Norway, Australia and Italy join China as mature economies with moderate economic growth and slowing population growth; the U.S. is more of an exception, with growth just barely above long-term growth rates, but with both a strongly growing economy and a strongly growing population (reaching almost 400 million in 2050). What does this mean for purchasing power? Three countries - Russia, India and China - are fully expected to lead the pack in terms of income, and hence consumption development, with average Russian consumption increasing by a multiple of 13 in 2030 from 2000 and no less than 32 times by the year 2050. This enormous increase is the result of Russia's severely declining demographics, coupled with continuing strong commodity price development over the very long forecast period.
In stark contrast to Russia (remember, a decline of 35 million Russian consumers), China adds some 118 million (although the period 2030-2050 shows a decline of more than 54 million) and India is expected to add no less than 571 million additional consumers, which puts the fairly remarkable increase in the U.S. of some 110 million additional consumers from the time period 2000-2050 in perspective.
Given the strong increases in per-capita consumption, coupled with strong demographic growth, the long-term future presents a remarkable opportunity for the development of a truly global middle class, with purchasing power that has never been seen before.
John Opie can be reached via email at john.opie@feri.de.
