The power of consumers is becoming the last best hope for emerging market investors as global recession risks rise. But even that’s starting to crack.
The power of consumers is becoming the last best hope for emerging market investors as global recession risks rise. But even that’s starting to crack. Consumption makes up about 60% of gross domestic product across many developing economies, with Brazil and Mexico among those leaning hardest on households, data from the Organisation for Economic Co-operation and Development show.
“If the global economy really starts to slow down even further, domestic demand will be the last resort to sustain growth,” said Satoru Matsumoto, a Tokyo-based fund manager at Asset Management One Co., which oversaw about $500 billion as of end-July. “Emerging markets with strong consumption will become more attractive as a strong consumer base would make monetary and fiscal policies more effective.”
While households are the last pillar in a flailing global economy hit by the U.S.-China trade war, consumption growth in emerging markets from Brazil to India is starting to slow down.
Matsumoto said bonds in countries such as Mexico, which has more room to lower rates and support domestic growth, are attractive as they bring in capital gains. He is currently overweight Mexico bonds and said he might increase his debt exposure in India and Indonesia should global growth weaken even more.
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Here’s how the outlook is shaping up across some key emerging markets (in alphabetical order):
CONSUMPTION SHARE OF GDP: 64.2%
Despite the central bank’s efforts to kick-start the economy by cutting interest rates to the lowest level on record, Brazil’s consumer confidence has dropped almost 10% from the start of 2019. Double-digit unemployment and a reduction in average net income mean that families’ consumption, which represents almost two-thirds of aggregated demand, rose just 1.5% annually in the second quarter. With President Jair Bolsonaro’s government focused on approving pension and tax reforms rather than providing fiscal stimulus, domestic consumption is expected to pick up only gradually in coming years.
CONSUMPTION SHARE OF GDP: 38.7%
Manufacturing-heavy China has been slowly trying to shift more of the growth burden to the consumer as part of a broader structural transformation. In the short run, that component of growth is unlikely to be a savior, especially as trade tensions with the U.S. continue to rage.
China’s retail sales have held up overall, though recently there are signs that edifice may be cracking. Sales grew 7.6% year-on-year in July, below 9.8% in June and missing the consensus forecast of 8.6%. Car purchases have been a clear area of weakness, declining in August for a 14th time in 15 months.
Price growth offers a two-sided story for China, and neither good: High-profile, runaway pork prices amid the ongoing swine fever outbreak cut against the festive spirit for upcoming holidays. On the other hand, the central bank is more concerned about what broader price disinflation says about waning domestic demand.
CONSUMPTION SHARE OF GDP: 59.1%
In India, buyers have cut back on spending in the past year or so amid worries about job losses, a crisis in the shadow banking sector and a general economic slowdown. Growth in private consumption halved to 3.1% year-on-year in the quarter through June, with recent high-frequency data pointing to more pain.
Car sales have plunged, while demand for two-wheelers and tractors has been subdued. Consumption of everyday goods like hair oil and 5-cent cookies have also taken a knock, dragging down company earnings and overall GDP growth, which clocked 5% in the April-to-June period for its lowest in six years. Slower growth is likely to weigh on wages in a country where per-capita income is about $2,000 a year, compared with China’s $9,800.
CONSUMPTION SHARE OF GDP: 57%
Household spending has remained firm this year, while retail sales have picked up, helping to underpin steady economic growth of about 5%. However, Finance Minister Sri Mulyani Indrawati has warned of a weaker outlook as the global economy slows, trimming her growth forecast for this year for a second time to about 5.1% in 2019.
She’s also said there are downside risks to next year’s projection of 5.3%, while the World Bank has an even more pessimistic outlook.
CONSUMPTION SHARE OF GDP: 65.3%
Mexico’s consumption figures show a tale of two indicators. On one hand, overall consumption figures since President Andres Manuel Lopez Obrador took office in December show a drop, with private consumption growing just 0.8% year-on-year in the latest available figures from June. An index of retail sales has failed to break past 2.8% growth this year — nowhere near 2018’s highest growth rate of 3.8% and the previous year’s 3.4%.
CONSUMPTION SHARE OF GDP: 51.5%
Russia’s battered consumers are a key threat to President Vladimir Putin’s drive to revive the nation’s economic growth. Real incomes have been stagnant for the past five years and Russians are increasingly turning to credit and savings to prop up their day-to-day spending needs.
The Economy Ministry forecasts real incomes will expand 0.1% this year, making an official goal of halving the poverty rate hard to achieve. Anemic consumer demand could help send inflation below the central bank’s target of 4% this year, eclipsing the impact of a tax increase and a weaker ruble on the pace of price growth.
CONSUMPTION SHARE OF GDP: 59.9%
An interest-rate cut in July and the lowest inflation rate in more than a year could support consumer spending in South Africa in the second half of 2019, according to Standard Bank Group Ltd. That may help boost an economy that’s not expanding fast enough to dent unemployment, which rose to a record 29% in the second quarter.
Consumer confidence started to recover in the three months through July, while retail sales growth is back in positive territory after plummeting toward the end of 2018. Retail stocks, down 12% in the past year, have outperformed the benchmark index since mid-August.
Not all the signs are positive though: Household debt as a percentage of disposable income has been on the rise for the past year after a declining trend since 2008. And the prospect of tax increases to help pay for a rescue of Eskom Holdings SOC Ltd., the state-owned electricity company, and a mooted national health insurance scheme, may erode disposable income and consumer confidence.
CONSUMPTION SHARE OF GDP: 59%
Turks’ confidence in their future well-being has been badly hurt by the currency’s crash last year, and that’s changing their spending habits, too.
Consumption has been contracting on an annual basis for the last three quarters, while it shrunk on that measure only twice in the last two decades — in 2001, when Turkey had its biggest financial sector crisis in its history, and in 2009, amid the global financial crisis.
An index tracking Turkey’s retail and wholesale companies slumped during the first quarter as the government’s push to suppress retail prices ate into companies’ margins. It recovered about 25% since as government-backed discount sales ended and the lira’s appreciation helped companies improve operational profitability.