Building capacity to help Africa trade better

Growing middle-class leading consumption drive in rapid-growth markets


Growing middle-class leading consumption drive in rapid-growth markets

Growing middle-class leading consumption drive in rapid-growth markets

Across the rapid-growth markets there will be nearly 200 million middle-class households by 2022 up from 94 million in 2012, according to EY’s latest Rapid-growth markets forecast (RGMF) released today [6 March 2014]. With the growing middle class buying a wider range of consumer products and services rapid-growth markets (RGMs) will increasingly look to their own markets to drive demand. Over the medium-term, RGMs still hold many winning cards.

As the number of middle class households increases, demand for health and education services is likely to expand significantly, also adding to the skills of the workforce. Spending on services such as communications, culture and recreation will grow at almost twice the pace of spending on food.

As a whole, RGMs are set to recover over the course of this year with 4.7% growth expected for 2014 and over 5% in 2015 but the risk of capital flight and a sharp slowdown has increased. According to the forecast renewed capital flight could lead to RGM growth falling closer to 3% by 2015, with global repercussions.

While growth is expected to remain steady, over the course of the next two years, more divergences are expected in terms of growth among the RGMs. Those in the Americas are struggling to regain momentum, while steady growth in China boosts Asia’s RGMs. With industrial production surprisingly strong in Poland and the Czech Republic, emerging Europe is gaining strength, looking to the West, particularly as Germany leads the Eurozone out of recession.

Looking at South Africa in the longer term

In the South Africa (SA) context, GDP growth rates remain below the global RGM trend at an expected growth rate of 2.7% for 2014 and 3.2 % in 2015. This does still mean, however, that SA will be growing faster than most advanced economies as well as several prominent RGM’s, notably Brazil and Russia.

Michael Lalor, Africa Business Center Leader at EY Africa says, “The consistent message coming through from the South African government as a whole is focus on implementing the National Development Plan (NDP). The emphasis that was given by Minister Pravin Gordhan in his annual Budget Speech around the focus of the NDP is therefore very encouraging. The extent to which government is able to make this shift successfully, with active support from the private sector and civil society, will determine which of the diverging RGM growth paths South Africa follows.”

Risks to the forecast

As jitters return to financial markets, some RGMs are still vulnerable. Heightened political risks or weak economic growth could trigger a wave of risk aversion, leading to changes in portfolio allocations away from rapid-growth markets’ assets. This could lead to capital flight which would impact several RGM’s are dependent on portfolio flows to fund their current account deficit. In this capital flight scenario, higher inflation, interest rates and debt payments would amplify the downturn. Along with falls in share and house prices, this would lower potential growth across most RGMs.

In this scenario, GDP growth in rapid-growth markets would fall to 3.7% and 2.8% in 2014 and 2015 respectively. This would in turn have a significant impact on growth in the advanced economies.

Indeed, a new term – the ‘Fragile Five’ – has been coined to describe the five economies supposedly most vulnerable to this scenario: India, Brazil, Turkey, Indonesia and SA.

However, the heatmap contained in the report provides a broader perspective on financial vulnerability, comparing RGMs across seven relevant factors. As may be expected, SA ranks lower on the current account deficit and currency volatility. However, on other factors, including government debt levels, the rankings are more moderate. In terms of average growth of credit markets as a share of GDP, SA is ranked the best in the world, reflecting the relative maturity of our financial system and credit markets. Overall, SA ranks ahead of ten of the other twenty four RGM’s we analyse, including India, Brazil, Turkey, and Indonesia, as well as the likes of Argentina, Vietnam and Poland.


Email This email address is being protected from spambots. You need JavaScript enabled to view it.
Tel +27 21 880 2010