Middle Class in Emerging Markets Means Growth: Cutting Research

A global consumer revolution is set to take off amid an unprecedented expansion of the middle class.

That’s the forecast of Karen Ward and Frederic Neumann, economists at HSBC Holdings Plc. Their analysis is based on the estimate that almost 3 billion people, or more than 40 percent of today’s population, will join the world’s middle class by 2050 -- defined as earning between $3,000 and $15,000 a year.

The majority will be in emerging markets, meaning such economies could make up almost two thirds of worldwide household spending compared with about one-third today, said Ward and Neumann. China, India and Russia are all set to enjoy average gains in real incomes of about 4 percent up to 2050, they said.

Demographics also benefit many emerging markets, given that individuals tend to consume the most between the ages of 16 and 40, they said. Although China’s median age of 35 is not far off the 39 for the U.S. and Europe, the Philippines’ comparable age is 23 and India’s 26.

“There are parts of the world where incomes are rising, they’re young and they’re ready to shop,” Ward, a former Bank of England economist, told an HSBC client conference in London on Oct. 17, accompanying the speech with a written report.

Companies need to establish their brand and reputation in such economies, especially businesses that sell the clothing, hi-tech and recreational products that will benefit from increasing demand, HSBC said. Ward projects that 59 percent of gadgets will be bought in industrializing nations in 2050, up from about a quarter today, while 56 percent of consumer financial services will be in those economies, from 18 percent.

There will also be an impact on the global economy. As developed nations slow, emerging markets will pick up the baton, ensuring consumer demand growth reaches 3 percent a year in 2050 from 2 percent today. This will provide a buffer against the risks of global stagnation by allowing the West to tap into the new demand source, said Ward.

The rise of the service sector will also make emerging markets less vulnerable to movements in global trade, the report said. Producers of cheap, low-value-added manufactured goods, typically other developing economies, will benefit as a result.

“We have this huge shift in the geography of final demand,” said Ward. “It’s going to be the emerging market consumer driving growth from here.”

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Whoever has the keys to the White House at the end of January is set to shake up U.S. monetary policy as Federal Reserve Chairman Ben S. Bernanke’s second term ends in January 2014, according to Macroeconomic Advisers LLC, where former Fed Governor Laurence Meyer is a senior managing director.

If President Barack Obama wins he’ll probably nominate Fed Vice Chairman Janet Yellen as Bernanke’s successor, Meyer and colleague Antulio Bomfim wrote in an Oct. 15 blog based on a report sent to clients.

Should Republican Mitt Romney take the White House, the candidates for the Fed chairmanship would probably be Columbia University Business School DeanGlenn Hubbard, Harvard University professor Greg Mankiw or John Taylor of Stanford University. All serve as campaign advisers.

Of these, all but Hubbard have previously detailed policy positions that would probably guide their decision-making. That let Macroeconomic Advisers list which are the most dovish, and therefore likely to back easier monetary policy, and those which are the most hawkish and so lean toward tighter monetary policy.

Taylor, a former Treasury official, is the most hawkish by the authors’ analysis, and the Fed would already have raised rates under his chairmanship. Yellen is the most dovish and the first interest-rate increase would still be two years away, they say.

Mankiw fell in between, with a rate rise about a year away, Meyer and Bomfim said. They deemed Hubbard probably to be more hawkish than Mankiw.

“Each of these potential chairs would have a significant impact on monetary policy in the long run, and, thus, the course of monetary policy could be significantly different depending on whether President Obama or Governor Romney wins the election,” Meyer and Bomfim said in their report. “Over the near term, however, policy might not be too different as the new Chair transitions into his or her new role and earns the confidence of the Committee.”

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Finance chiefs and global lenders who warned last week at the International Monetary Fund meeting in Tokyo about the threat of the looming U.S. fiscal cliff now have a way to measure its potential effects.

With the U.S. facing about $600 billion in automatic tax cuts and spending increases early next year, Dario Perkins, an economist at Lombard Street Research, has designed an online tool to measure what could happen in the U.S., China and the euro area under different assumptions.

The tool allows participants to crank in different scenarios for how much lawmakers reduce the size of the cliff, as well as for the so-called fiscal multiplier. It measures the effect a budget consolidation has on the economy.

If, for example, fiscal consolidation next year is the equivalent of 5 percent of U.S. gross domestic product and the multiplier is one, then the American economy will shrink 1.5 percent, according to London-based Perkins. China would grow 4.2 percent and the euro-area would contract 2.6 percent.

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The savior of the euro area may be Asia, not Germany, says David Carbon, an economist at DBS Group Holdings Ltd. in Singapore.

Just as it has in the past four years, Asia will drive global growth next year, Carbon said in an Oct. 16 report. With German domestic demand unable to expand fast enough to help the euro region through its crisis, Asia “adds” the equivalent of Germany to the Asian economy every 3.5 years, he said. That provides export support for Europe and rest of the world.

“Throw Germany out the window today, Asia will replace it by 2016,” said Carbon. “And it will add another by 2020.”

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The number of women-owned businesses in the U.S. is growing at more than double the rate of all other companies, calculates Caroline Anstey, managing director of the World Bank in Washington.

Women-run companies contribute $3 trillion and 23 million jobs to the U.S. economy, Anstey said in an Oct. 10 blog.

That shows the advantage of supporting women entrepreneurs in the developing world, where 30 to 40 percent of small- and medium-sized businesses are run by women. Yet at least nine out of 10 have no access to loans, she wrote.

“Investing in women entrepreneurs is smart economics,” said Anstey.

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The U.K., the first country to host a modern summer Olympics while in recession, like its past counterparts failed to get an uplift from hosting the event.

So say Citigroup Inc. economists Michael Saunders and Ann O’Kelly in an Oct. 12 report.

There was a positive impact at the local level, with large declines in unemployment in areas where events were held, they found. Nationally, though, the economic boost from construction came in previous years. The number of foreign visitors to the U.K. also fell in June to August from the previous year, according to the Office for National Statistics.

While the U.K. was experiencing a 0.5 percent decline during the second quarter, the average GDP growth rate for previous hosts since 1964 was around 5 percent at the time of the event.

For those past Olympic nations, growth peaked about two quarters before the games and then trailed off. The U.K. is following the pattern, the economists said.

While the cost of organization probably led growth to accelerate in the third quarter “the economy’s underlying path remains weak,” said Saunders and O’Kelly. That will likely require the Bank of England to embrace more quantitative easing, they said.

To contact the reporter on this story: Simon Kennedy in London at at skennedy4@bloomberg.net.

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net.

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