Tapering labour boom of China could spell volatile 2020s, says Bain

30 April 2018 Consultancy.asia

As a number of global forces track toward a collision-point, the strategy and management firm Bain & Company has made the case for what it predicts will be a more volatile economic environment in the 2020s, with China’s tapering labour force central to concerns.

In a wide-reaching report by the Macro Trends Group of global strategy consultancy Bain & Company, the firm has predicted an unsteady period of economic disruption for the upcoming decade and beyond – a major transformation it believes could be greater than any such transitions of the past 60 years.

The report, ‘Labor 2030: The Collision of Demographics, Automation and Inequality,’ looks into the interplay of these three major forces, already impacting the public and private spheres but set to completely reshape the world in the short-to-medium term. And China, so pivotal in the provision of labour which has powered economic growth since the last great transition of the 1970s, will likewise play a central role in its reversal.Global market entry of China and India more than tripled the size of the  world’s labor forceTracing a series of potential scenarios at the intersection of ageing populations, rising inequality, and the promise of automation, the Bain analysis projects that the rapid spread of automative technologies could shed up to a quarter of current jobs and otherwise widely depress wage growth to in turn create greater wealth inequality and push output potential (through higher productivity) beyond demand potential.

Noting China’s level of income inequality at a current historic peak, the report states that, “faced with market imbalances and growth-stifling levels of inequality, many societies may reset the government’s role in the marketplace.” And the mass investment spike into automative technologies (as much as $8 trillion projected by the firm in the US alone) initiating this scenario, could in effect be stimulated by the threat of a declining workforce and labour scarcity.

As one of three remarkable developments which converged in the 1950s to ignite the global economy through labour-force growth, including the coming of age of the baby boomer generation and greater female workforce participation, the integration of China together with India into the global economic sphere saw the addition of 1.3 billion new workers to the world labour pool between 1970-1990 – fuelling the international trade of goods and services.Baby boomers powered worldwide labor force growth in 1970s and  1980s, but this is slowingBut the era of plentiful labour is about to come to an end, irrespective of trends toward later retirements. China’s growth rate in the working-age population bracket of 25-54 year-olds during the 1970-1990 boom sat at 2.8%, followed by 1.8% growth in the two decades to 2010. For the 2010-2030 period, Bain projects growth in the age-group at minus 0.4%.

This negative rate is in line with the countries of the OECD, among which the firm contends that the deceleration in labor force growth could, on the balance of several factors, result in a $5.4 trillion shortfall in otherwise expected GDP by 2030. China’s situation, the firm says, is even more precarious due to its one-child policy; “The combination of a baby boom followed by a baby bust will abruptly diminish China’s labor pool and could aggravate labor scarcity.”

Future ramifications

The forthcoming governmental and societal challenges of ageing populations are familiar ones; strains on the pension system, high debt levels, and surging healthcare costs. Even the healthcare sector of the major economies of Southeast Asia, generally considered a younger demographic, will according to a recent report by strategy firm Solidiance face a potential $320 billion black-hole by 2025 – and as predicted by Bain, “governments confronted with serious economic imbalances often have opted for a more active role in reshaping market-based outcomes,” with options including tax, labor market and regulatory interventions.

As for businesses, the prospective implications of a volatile macroeconomic environment mean that leaders and investors should be wary of following market momentum; “The crosscurrents of multiple macroeconomic forces will ebb and flow at different times, making it dangerous to assume that signals indicate stable opportunities. Trends that had longer trajectories up until now, such as falling interest rates or even growth itself, may reverse course far more rapidly than in past decades,” the consulting firm concludes. “Companies can prepare for such shifts by making resiliency a high strategic priority.”

Economic boom will see 500 million Indians enter middle-class within a decade

18 April 2019 Consultancy.asia

India’s economy is projected to grow at a base rate of 7.5% annually to 2030 according to an analysis from Bain & Company, with 500 million people moving into the middle- and high-income bracket over the period.

India has boomed in recent years, buoyed by a growing population and rapid economic development. Today the country is the world’s second largest in terms of population and sixth largest in respect to economic clout – with its economy still growing as one of the world’s fastest, at 7.5% in 2017. As incomes have risen, millions of citizens have moved up into new consumer categories.

An analysis from Bain & Company for the World Economic Forum shows that the future is also bright for the country according to long-term fundamentals, with a growing GDP of which around 60% is domestic private consumption, insulating it to a degree. There is also a healthy savings rate, at around 22% of income, and a large working age population, with a median age of 28 years.Evolution of household income in IndiaThe Indian economy is projected to enjoy strong growth in both the low and high case scenarios considered in the analysis. The base case will see economic growth stable at 7.5% on average until 2030, with just a 1% degree shift either side of this figure for the lower and the higher case scenarios. The effect of growth for the base case is an additional 500 million middle- and high-income earners added to the economy to 2030, with 50 million fewer in the low case scenario – pushing the share of upper-middle and high-income earners to 48% of the total population.

The firm’s projection of income growth would see consumption spending increase from $1.5 trillion to a massive $5.7 trillion by 2030. The growth is largely driven by a huge increase in the country’s middle class households, which are set to expand by 140 million, while the high-income earners are set to grow by 21 million – together a 51% increase on 2018. The middle class will see its share of total consumption increase from 30% to 47%, while around 25 million people will be rise out of poverty, with total poverty decreasing from 15% to 5% of the population.Indian population statisticsUnlike much of the developing world, India is ageing slowly, with a current median working population age of 28 which is set to rise only slightly, to 31, by 2030. The effect is that by 2030 the country will have the largest working age population at the youngest relative age. The rural population has also shrunk considerably since 2005, falling from 59% of the population to 51%.

The developed rural population has grown slowly over the same period, from 13% to 15%. The urban population meanwhile has increased from 28% of the population to 34%. Urbanisation is also set to continue. By 2030, the rural population is projected to decrease further, to 44%, with developed rural only growing by 1% in the period. Urban development is projected to hit around 40% by 2030.

The ongoing urbanisation and rising incomes will lead to further consumer shifts. With considerable changes to income distribution across India, growth in the middle class segment is expected to see around $2 trillion in incremental spending on affordable mid-priced offerings, while a further $2 trillion will be shifted to more premium product lines as consumers trade up.Consumer spending shifts in IndiaBain notes that buying behaviour will shift in line with both trading up as well as in new category spending. In food for instance, around 25% incremental spending will shift towards more premium goods, while around 32% will shift into health and organic food stuffs.  Personal care meanwhile is set to see considerable premiumisation, at 59% of incremental spending, as well as a broadening of product categories.

“India will continue on its path as one of the world’s most dynamic consumption environments, propelled by five major drivers: income growth; steady and dispersed urbanisation; favourable demographics; technology and innovation; and evolving consumer attitudes,” states the report. “As these drivers move India forward, many stakeholders have the potential to shape the country’s positive consumption future.”

It concludes: “The time is ripe for these stakeholders to come together and address head-on the most pressing societal challenges facing India today – skilling and job creation, socio-economic inclusion of rural India, and building a healthy and sustainable future for its citizens. Collaborative efforts to address these challenges will unlock the full potential of a young, connected and thriving nation, and establish India as a model for fast-growing consumer markets of the world.”