The global economy appears to be stable for now, but still fraught with risks. While more analysts are expressing confidence for the short-term, there are still plenty of long-term challenges. And with the United States still stagnant and Europe in recession, many are wondering who can drive growth? One potential bright spot in the global economy is the continued rise of consumer spending in emerging countries across Asia, Eastern Europe, and Latin America. Still, it is fair to question if demand from emerging countries can be relied on to jump start an otherwise stagnant global economy.
A recent study by Euromonitor found that consumer spending is indeed on the rise across the emerging world. From the period of 2007 to 2012, disposable incomes in Eastern Europe, Asia Pacific, and Australasia all increased. Interestingly, Eastern Europe, not booming Asia, saw the fastest growth in disposable income. And although Western Europe is wallowing in a deep recession, several Eastern and Central European countries are still growing. Slovakia, Kosovo, Estonia, and numerous other Eastern and Central European countries actually saw their economies grow by 2 percent or more in 2012.
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Consumer spending rises as disposable income does
Considering rising disposable income may be a more effective way to measure economic growth potential than GDP numbers. As disposable income rises, people will have more money to spend. They will start going to the movies, buying cars, going out to eat, and numerous other things. In many modern and developed countries, such as the United States, consumer spending can easily top 70 percent of the Gross Domestic Product. According to the IMF, in China, Thailand, and Malaysia consumer spending counts for less than 60 percent of the economy. In fact, in China it is a mere 34 percent, while in Malaysia it is only 49 percent, and in Thailand 53 percent.
Drop in disposable income can hurt China
As consumer spending increases in developing countries, it could have major impacts on the global economy. Disposable income has actually dropped in the United States and Western Europe, which will hurt export oriented countries such as China. As these export countries shift to domestic demand driven economies, however, they could become major destination markets for a variety of goods. This could help such countries not only sustain their own growth, but also spur production elsewhere.
Still, there are deep questions regarding whether the growth of consumer spending in emerging countries will actually benefit Western countries. Most of the demand will be for consumer goods, such as clothing, and electronics. By-and-large these goods are produced in developing countries themselves. Even most automobiles are built within the region they are sold. Ford Motor Company (NYSE:F), for example, owns manufacturing plants in India, China, Thailand, Europe, Mexico, and North America. Thus, demand for cars in China may not increase automobile manufacturing jobs in America. This means that demand in emerging countries may not actually spur production in developed countries but instead in emerging countries themselves.
On the other hand, rising costs in emerging countries could draw jobs back to the United States, Western Europe, and elsewhere. As countries such as China grow more affluent, workers will demand higher wages and better working conditions. Already, jobs previously shipped to Mexico and China have begun to slowly trickle back into the United States. With labor and production costs in these regions on the rise, manufacturers are increasingly seeing the shipping costs and other difficulties not worth the trouble. In fact, some 500,000 manufacturing jobs have been created in the United States in the last three years alone.
Rising costs may encourage jobs to be relocated to the US
Rising consumer income in emerging economies may not be enough to lift the sagging economies in developed countries. There could be exceptions, however, for luxury goods, such as Hollywood movies, Italian clothing and French wine. If advanced nations want to tap into consumer growth in emerging markets, they will have to figure out where they can truly add value to emerging market consumers, and that won’t be in low costs but instead in high creativity and high quality. Meanwhile, rising costs may encourage some, but not all, manufacturing jobs to relocate in the United States and elsewhere.