Global Slowdown In Consumer Spends Could Impact India's T&C Exports

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Global Slowdown In Consumer Spends Could Impact India's T&C Exports

Consumer spending in India's top markets has slowed down. Moreover, there is a definite trend of more spends on education, travel, recreation, and in some cases, luxury items, than on possession of physical commodities.

In contrast, consumer spending in China is on the rise, and will continue to remain strong for some time. India's textile and apparel exporters will need to work hard to meet the US$ 45 billion export target for FY2018, and find a place in the global market.

US consumer sentiment falls in June, current levels to underpin consumer spending in months ahead

A recent University of Michigan study reports weaking in US consumer enthusiasm. US consumer confidence dropped from its recent highs in June. The preliminary June estimate of the University of Michigan consumer sentiment index dropped three points to 94.5. Consumer sentiment rose sharply in the months immediate after the presidential elections last year; however, it has come off those highs since.

Why American Consumers Aren't Spending

Why the huge differences between robust consumer confidence and weak retail sales growth? A number of forces are at work.

1. Weak income growth. Inflation-adjusted incomes for most Americans have been declining for more than a decade, with total real wages and incomes holding about flat. Average private-sector weekly earnings, inflation-adjusted, rose just 0.3% in April from a year earlier.

2. Professionals offering actionable insights on markets, the economy and monetary policy.

Postwar babies are forced to save. In their earlier years, when most young households spent more on goods such as cars and appliances, they really went overboard. In the 1980s and 1990s, when the postwar babies born between 1946 and 1964 were in their mid-20s to mid-50s, the saving rate of those age groups was plummeting. So many now must save vigorously and are, pushing up the household saving rate.

Their only other option is to work until they die, and many are employed well past normal retirement ages. The labour participation rate for people over 65 - those with jobs or actively looking for work - reversed its long slide in the early 1990s and has risen sharply ever since. Older people are cautious spenders and the postwar babies are a huge percentage of the population, 22.9%. A recent study found that Americans in their 60s and 70s start to spend less even when they can afford to enjoy their life's savings. People spend 2.5% less per year between 60 and 70, and cut back even more in later years. Many become risk-averse as they age since they are progressively less able to work to cover unexpected expenses.

3. Many Americans are still stressed financially. The rises in incomes and net worth have predominantly gone to high-income and high-net-worth households. They are the ones who own most of the stocks that have more than tripled since the March 2009 low. Also, upscale folks have been the primary beneficiaries of the recovery in house prices. Those people, however, don't change their spending appreciably as their assets and net worth rise.

4. Deflationary expectations are delaying spending. When potential buyers expect lower prices later, they withhold purchases in anticipation. Then inventories and excess capacity mount, forcing prices down. This confirms expectations, so purchasers delay action even further.

5. In the US, consumers' expectations of inflation have fallen recently. Not only are the prices of cars, appliances and other consumer goods falling, but also services inflation rates are declining in a wide variety of major areas.

Services inflation is important because as incomes rise, a growing share of consumer spending is on services, which now account for two-thirds of household outlays. A family needs only so many washing machines but can spend almost unlimited amounts on recreation, travel and health care.

6. Online retail sales continue to leap at the expense of department stores and other brick-and-mortar sellers. In the first quarter, online sales jumped 4.1% from the fourth quarter and rose 0.3 percentage points to 8.5% of total retail sales. In April, online sales rose 1.4% and were up 11.9% from a year earlier, while department-store sales fell 3.7%.

This shift is devastating to brick-and-mortar retailers, their owners and employees, but it also tends to retard overall retail sales by discouraging impulse buying. About 30 percent to 50 percent of all purchases in physical stores are impulse buys. Online shoppers are less prone to impulse buying than in-store customers.

7. Major consumer brands are losing ground as frugal consumers search for discounts and house brands.

UK reports first fall in consumer spending in 4 years, outlook remains bleak

As we had anticipated, consumer spending in UK will slow down after the country announced its decision to exit the European Union. According to a report by payments provider, Visa, "Consumer spending has fallen on an annual basis for the first time in almost four years, as higher prices tighten their squeeze on British households".

Adjusting for inflation, real consumer spending by British consumers on Visa debit, credit and prepaid cards in May was 0.8% lower than in the same month last year. Visa said that seasonally adjusted spending was 1.8% lower in May compared to April. Britain's economic growth has slowed down too.

The data are based on a survey of one-third of money spent on Visa debit, credit or prepayment cards in Britain, which are used in almost 10 billion transactions every year. If Visa's figures provide a reliable indicator of the forthcoming official data for the second quarter, they suggest there will be an additional weakening in household consumption, which accounts for more than 60% of the economy.

Visa said that the year-on-year decline in spending was greater on the high street than online, with sales of clothing and household goods hit particularly hard. In contrast, spending on restaurants, bars and recreation all had healthy annual increases in spending. Annabel Fiddes, an economist at IHS Markit, which produces the data with Visa, warned, "The outlook for consumer spending continues to look relatively bleak, with households facing faster increases in living costs and muted wage growth."

The latest official data showed inflation hit its highest level in four years during April, with consumer prices 2.7% higher than in the same month in 2016.

UAE luxury retail sector 'still attractive' despite slowdown

Consumers in the UAE say they have increased their spending on luxury products by 70% over the past five years, much higher than in more mature markets such as Europe and the United States. A new report from Deloitte said emerging consumer markets, such as the UAE, China and Russia, continue to drive luxury market growth globally. According to the fourth annual Global Powers of Luxury Goods report, luxury retail spending rose by 53% since 2012 in the more mature markets.

James Babb, clients and industries leader, Deloitte, Middle East, said the market in the Middle East continues to represent a big opportunity for luxury brands. "Luxury markets in Abu Dhabi and Dubai have helped to promote these cities as desirable shopping destinations. Well established big-name brands have performed well in the region, and tourism is a major driver of sales in Dubai." However, he added that the market saw a significant slowdown in 2016, caused by the low oil prices, higher gold prices and an increase in the cost of living.

"The region is likely to feel the impact of political unrest as well as global economic uncertainty, but further growth is nevertheless expected as Dubai and Abu Dhabi continue to be attractive shopping destinations," he noted. The report said that the world's 100 largest luxury goods companies generated sales of US$ 212 billion in 2015. The average luxury goods annual sales for a Top 100 company is now US$ 2.1 billion. Italy was ranked the leading luxury goods country in terms of number of companies, while France has the highest share of sales - with 26 companies in the Top 100.

Consumer spending in Malaysia to increase 5.8% in 2017

BMI Research reported that consumer spending in Malaysia is set to increase. The rise will be brought about by the increasing disposable income. Real household spending growth in Malaysia will continue to expand the medium term. However, it will be modest on the back of an uptick in inflation and slightly weaker currency. Household spending will become more dynamic over the medium term as the share of non-essential spending rises. BMI foresees household spending real to grow at an annual average of 5.3% between 2017-2021. In 2017 we project a y-o-y increase of 5.8%

Consumer spending in Malaysia will benefit from a youthful and increasingly urbanised population; rising household incomes; and low levels of unemployment. The growing middle class and relatively low inflation will help generate demand for non-essential items and luxury goods. Spending will rise in education, restaurants and hotels and recreation and culture spending.

"The country is also experiencing a shift in retail formats with the government supporting development of 'big-box boulevards' - concentrated centres of shopping outlets on the outskirts of cities. This is helping to attract both domestic and international retailers, who are keen to capitalise on the forecast rise in household spending in the retail sectors. We forecast total household spending to expand at an annual growth rate of 7.5% between 2017 and 2021 and reach a total figure of MYR1trn (up from MYR774bn in 2017), which converts into USD172bn in 2017 and USD265 in 2021," the report states.

Philippines consumer spending remains weak

Household spending in the Philippines is expected to post a slower growth this year because of rising consumer prices and a weaker currency, Business Monitor International, a unit of Fitch Group, said in a recent report. "In US dollar terms, household spending growth will experience a significant deceleration from 6% in 2016 to 0.8% in 2017 as we forecast the Philippine peso to depreciate against the US dollar over 2017," BMI said.

"With that said, household spending will grow at an annual average of 8% between 2017 and 2021, reaching US$ 337 billion up from US$ 232 billion in 2017," it said. BMI expects essential spending to remain dominant over its forecast period and account for 74% of total household spending in 2017 and 75% by 2021. Essential items include food, beverage, housing, clothing, utilities and basic services.

Essential spending is expected to grow at an average annual rate of 9.5% between 2017 and 2021. "As a result of low average incomes and a large rural population, essentials will continue to account for the majority of household spending in the medium term at least. Real wages are steadily on the rise, which should boost spending," BMI said.

Japanese retailers cut prices to attract consumers

Japan's government has upgraded its assessment of the economy for the first time in six months in light of healthy consumer spending - though neither the cabinet, the business community nor the public seems truly confident that things are looking up. "The Japanese economy is on a moderate recovery," the Cabinet Office's monthly economic report said, omitting the reference to a "delayed improvement" in some areas mentioned through last month.

Robust corporate earnings have given the job market a lift, which, in the official view, has stoked consumer spending. Business investment, housing construction and public investment all improved over May, underscoring solid overall demand.

Private consumption, the piece at the centre of the puzzle, is improving "moderately," the report said, mirroring a similar upgrade this month by the Bank of Japan. While consumer spending took a hit earlier in the year, it has since stabilised. Demand for travel and auto sales are both looking up, as are retail sales figures from businesses such as department stores and supermarkets.

Private doubts

But the government does not seem entirely confident in these developments, nor does the public seem to have a tangible feel for them. Consumption "could take a turn for the worse," Nobuteru Ishihara, economic and fiscal policy minister, told a news conference last week. A representative of the Cabinet Office explained that "compared with employment and income, consumption has room to strengthen a little."

Consumers still show a strong propensity to save, reflecting a certain amount of anxiety about the future. Thus even as real incomes rise, spending fails to follow. Total wages earned by Japan's workers have risen 3.5% since January 2015, while consumption grew just 1.8% over the same period. And according to preliminary data from the country's top business lobby, the Japan Business Federation, summer bonuses are shrinking for the first time in five years - an indication that workers will stay reluctant to open their wallets.

This weakness is even starker in historical context. Consumption is growing in the current economic recovery at less than one-tenth the pace it did during a 57-month economic expansion that began in 1965 or the 51-month bubble of the late 1980s, and therefore lacks the power to propel the economy as a whole.

Leaner times

"Factors such as rising social insurance premiums are eating away at disposable income," said Naoko Kuga of the NLI Research Institute. It is all households can do to secure the necessities, she explained. A close look at retail statistics, strong on the surface, bear this out: Companies are frantically cutting prices on everyday items, doing their best to get consumers to buy.

Ryohin Keikaku, operator of clothing and household goods seller Muji, will cut prices on fall- and winter wear 10-30% after making similar reductions for the spring and summer, sacrificing profit margins to get more customers in the door. "Consumers' strong inclination to save likely means fiercer price competition ahead," said Masato Nonaka, president of casualwear chain Shimamura.

South Africans too are spending less

Slow consumer spending due to rising unemployment has been highlighted as one of the main indicators that South Africa's economy is not growing. Stats SA says the adjusted Gross Domestic Product (GDP) for the first quarter contracted by 0.7%. In the three months prior to this, GDP contracted by 0.3%. The country has slipped into a technical recession.

While agriculture and mining have shown improvement, the financial, manufacturing and retail sectors have contracted. Nedbank economist Isaac Matshego says consumers don't have extra money. "We're seeing weakness in consumer spending and the services sector and that's quite disappointing because in the past quarters, those sectors are sort of boosted."

Retail trade sales were down 5.9% quarter-on-quarter with concern that this is indicative of high unemployment. At the same time, there are concerns that with South Africa being in a technical recession, the country is heading towards its worst growth slump in three decades. The Reserve Bank has hoped to achieve overall growth of 1% for 2017. However, the economy has been on a downturn since December 2013 and it seems like it's going to continue at least for a good part of this year, estimate analysts.