Consumption growth has been very strong in the BRICs, particularly in China and Brazil. We reported in July that consumption had led the BRICs' recovery from the crisis and we predicted that growth would slow as fiscal stimulus wore off. This has indeed happened, but now the process is exacerbated by another problem – inflation.
Inflation is slowing the growth in real incomes despite rapid increases in nominal wages. In countries where food makes up a large part of the consumption basket – notably India and China – the recent surge in food prices has hurt purchasing power. Not surprisingly, higher inflation has led to lower consumer confidence, which is most evident in China.
Although strong economic performance has produced low unemployment and high income and consumer credit growth, this looks likely to change as governments step up their efforts to fight inflation. We expect the most aggressive tightening in Brazil, while Russia will be able to contain inflation relatively easily. India will tighten but is unlikely to do so at the expense of high growth. China will continue to tighten but will fail to adequately address the problem of food inflation.
For these reasons, we expect consumption growth to slow. This slowdown does not negate the theme of emerging middle class consumption in the BRICs; rather, it highlights that more moderate rates of growth are in prospect.
Real retail sales growth in China, at nearly 15 per cent, is the highest among the BRICs. Inflation, however, is increasingly eating into real incomes, suggesting that real retail sales will trend lower in the near term. Food inflation in particular is eroding real incomes despite rapid increases in wages. Moreover, consumer confidence has clearly been hurt by the spike in inflation. As the central bank steps up its efforts to control inflation – via administrative measures and higher reserve requirements – we expect to see the CPI peak at around 5.5 per cent sometime in Q2/11 before slowly levelling off. Overall, we expect CPI inflation of about 4.5 per cent for 2011 as a whole.
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Retail sales growth is strong and we expect it to continue to be so in the coming year. Despite rising retail inflation, personal incomes have also been rising rapidly due to labour shortages and government policies to boost consumption. In recent months, however, inflation has cut into retail sales growth in real terms – in November retail price inflation increased to 3.9 per cent from 3.3 per cent in October and real retail sales growth decreased to 14.3 per cent from 14.8 per cent. The prospect is for several more months of modest declines in real expansion of retail sales before the trend levels off. |
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Passenger car sales grew very robustly during 2009 after the government introduced a tax break – cutting the purchase tax in half – and provided subsidies to rural consumers. Although the upward trend slowed sharply in H1/10 due to a temporary saturation of market demand, towards the end of the year sales picked up again as consumers took advantage of the tax breaks before they expired on 31 December 2010. We expect car sales growth to slow in 2011 but remain positive. |
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The rapid increase in residential property sales during 2009 and early 2010 helped fuel a price bubble that the government has taken several steps to deflate. These have been successful in slowing down the volume of residential properties sold. However, strong underlying demand has led to a resurgence since August. During 2011 the government is pushing to expand low-income housing and to introduce property taxes targeted at high-end units in Tier 1 cities. |
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Per capita income is rising markedly: urban workers’ disposable income was up 11.1 per cent in Q3/10, while that of rural workers grew even faster at 13.8 per cent year on year – suggesting the gap between rural and urban is narrowing. However, as inflation has increased, real income has decelerated. Urban consumers have been hardest hit by escalating food prices. |
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Consumer confidence recovered in H2/09 and H1/10 but stayed below pre-crisis levels. Confidence has dropped sharply since June – the Confidence Index fell to 102.9 in November, only just above the lows reached during the crisis. High inflation is consumers’ main concern. In a Q4/10 PBoC survey, price satisfaction hit record lows, with 73.9 per cent of respondents saying they considered prices “too high to be accepted”. |
Consumption is booming in Brazil but a cycle of monetary tightening – expected to begin after the 19 January Banco Central monetary policy committee (COPOM) meeting – will dampen this trend. Inflationary pressures are reflected in a record low unemployment rate, real income growth above 6 per cent and consumer credit expanding 25 per cent year on year. Real income growth has already come down from its peak as a result of a sharp upturn of inflation. Consumers are much more confident about the current economic situation than they are about the future; consumer credit will slow considerably as monetary policy is tightened and the government cuts spending. We expect the rise in consumption to settle at a lower but still strong level.
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Retail sales recovered from a low expansion rate of 3.7 per cent in March 2009 to a high of 12.8 per cent in March 2010. Since then growth has slowed modestly but the overall trend is still robust at 10.2 per cent in November (three-month moving average). Consumption of durables has been particularly strong, helped by the rapid expansion of housing and consumer credit. With 200 bps of monetary tightening in prospect during the next six to nine months, we expect retail sales to slow more markedly over this period. |
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Real income growth recovered well in 2010, reaching a high of 6.9 per cent in September before decreasing to 6.6 per cent in October. The decline was due to an upturn in inflation – a trend that has likely continued since October as inflation has increased further. Although higher inflation clearly hurts consumers’ purchasing power, a tight labour market will ensure continued strong real income growth, albeit at a slower pace. |
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Consumer credit has been booming, increasing 24 per cent year on year in July. This has clearly added to inflationary pressures in the economy but monetary tightening over the next six to nine months will substantially reduce its further expansion. In addition to the coming interest rate hikes, cuts in the availability of housing credit provided through the state-owned savings bank Caixa will slow consumer credit growth. |
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The Brazilian labour market is extraordinarily tight. The unemployment rate dropped to 5.7 per cent in November, a record low. This has translated into rapid increases in wages, outpacing inflation by up to 7 per cent. Monetary and fiscal tightening will slow economic growth and at the margin create some slack in the labour market. However, the prospect of record spending on priority infrastructure projects will continue placing upward pressure on wages, especially in construction. |
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Brazilian consumers are very confident, but mostly about the current economic situation. In November total, current and future consumer confidence reached highs of 125, 147 and 113 respectively. In December confidence – particularly about the future – decreased, pointing to worries about inflation and the expected monetary tightening. |
Consumption in Russia was hit hard both by the economic crisis and by the drought during summer 2010. Since then consumption has recovered, helped by the government’s expansion of pensions and a targeted stimulus programme for car purchases. Real household consumption is now rising by nearly 7 per cent, reasonably strong but below the soaring figures recorded in the other BRICs. Although inflation is less of a problem than in the other BRICs, the recent surge in food prices has clearly slowed rises in real income. This slowdown and a modest tightening cycle by the Central Bank will dampen consumption growth early this year but the approaching elections should lead to further official efforts to boost personal incomes during H2/11.
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Real retail sales plunged during the crisis and did not turn positive until early 2010. By last July sales growth had climbed back to 6.8 per cent, but then slowed to 4.6 per cent in November. This drop tracks the deceleration of real income caused by a surge in inflation after the summer drought pushed up prices. Nominal car sales developed very rapidly in 2010 due to the government’s Rb10 billion (US$334 million) “cash-for-clunkers” programme. Because of high demand the programme has been extended by another Rb10 billion in 2011. Continued strong sales of cars can be expected, albeit at more modest rates of increase. |
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Household consumption dropped by over 10 per cent year on year in the midst of the crisis but has since recovered to reach a real growth rate of 6.7 per cent in September, helped by substantial increases in pensions at the beginning of the year. Government consumption continued to rise during the crisis but is currently flat. We expect household consumption to slow modestly in early 2011, but further pension increases and an expected boost to incomes in advance of elections later this year should sustain steady expansion. |
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After a large decrease during the crisis, real income recovered in 2010, rising to a peak of 6.7 per cent in June, still well below the pre-crisis rate of above 10 per cent. Since June, the rate of increase of real income has slowed as a result of higher food inflation (non-food inflation was relatively unchanged at around 5 per cent). As the Central Bank cautiously tightens policy, inflation will fall but nominal incomes will decelerate as well. We therefore expect a stabilization of real income growth in the coming three to five months, followed by a modest upturn as inflation rates trend down during H2/11. |
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The unemployment rate declined to 6.7 per cent in November after peaking at 9.4 per cent during the crisis. Despite the falling trend, unemployment is still above the pre-crisis low of 5.4 per cent recorded in May 2008. |
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Consumer confidence was extremely low at the onset of the recent crisis. It improved during 2009, becoming just positive early in 2010 before turning down again. Overall consumer confidence decreased again in Q3/10 to minus 11 from minus 7 in the previous quarter. The 2010 drought and resulting surge of grain prices were undoubtedly a major factor in this trend. Confidence for major purchases has never fully recovered since the crisis. |
Consumption growth in India continues to be strong, supported by a rapid increase in personal incomes. However, rising inflation, which reached 8.4 per cent in December, will erode some of the gains in real incomes. The rise in overall prices has been driven by food inflation, which was running at 16 per cent in the last week of 2010, and has increased political pressure on the government to curb further price rises. As a result we expect the Reserve Bank of India (RBI) to resume monetary tightening at its next policy meeting on 25 January, although higher interest rates will be ineffective in tackling the structural roots of food inflation.
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Industrial production of consumer goods accelerated to very high levels in late 2009 to mid-2010 but slowed towards the end of the year. The deceleration in consumer goods production has mirrored that of overall industrial production and suggests that the RBI’s policy tightening is starting to have an impact on overall economic growth. |
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Last year record passenger car sales, up 31 per cent on 2009, helped drive growth in consumer durables. Auto sales will continue to increase in 2011 but at a markedly slower pace. The Society of Indian Auto Manufacturers warns that the rise in sales could slow to around 12-13 per cent in 2011 as fuel and other commodity prices increase and higher interest rates boost the cost of financing auto purchases. |
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Dabur, a leading manufacturer of fast-moving consumer goods (FMCG) such as shampoos and toothpaste, has continued to see strong sales growth. Rural consumers have been the biggest contributor to overall FMCG sales as incomes have risen on the back of government spending on rural development and employment programmes as well as the shift in rural labour to non-farm jobs. |
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The expansion of personal loans has slowed in Q3 2010, in part as a result of a deceleration of housing loans, which constitute the largest portion of overall personal loans. Loan growth is likely to remain at lower levels as the RBI continues to hike interest rates. |
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Consumer confidence is still very high in India and shows no sign of weakening. India remains at the top of the latest Nielsen survey of global consumer confidence. However, the country also has the highest food inflation among the BRICs, and continued high and rising food prices could weigh on consumer confidence in the coming three to six months. |
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