In a new report, Morgan Stanley analysts Chetan Ahya, Derrick Kam and Jenny Zhang write that they expect consumption to show resilience in China, while Indian consumption moderates.
In China, private consumption’s share of GDP fell to 34% in 2010, from 45% in 2001. In the past year, discretionary spending was checked by tighter monetary policy and higher inflation. Lower growth and inflationary woes will continue to impact the Chinese consumer for the next few months. But these pressures are expected to ease in the second half of 2012, as the Chinese government implements structural reforms which include steadily increasing minimum wages and lowering taxes. Morgan Stanley analysts cite three main reasons for this change:
- Consumption growth is expected to be driven by wage growth – “The government aims to grow household disposable incomes (wages) at a pace that at least matches nominal GDP growth.”
- The government is pushing for affordable social housing which will eventually drive consumption, as consumers begin to feel more secure about their homes.
- Disposable income is expected to free up as the government improves social security and works towards extending social services like public education, healthcare, and housing for more residents.
Meanwhile, Indian domestic consumption is expected to moderate. After the credit crisis, the Indian government increased its expenditure to GDP by 4 percentage points and most of it went towards boosting household consumption. It also increased rural wages, which have posted a 27% compound annual growth rate (CAGR) over the last three years. From Morgan Stanley:
“We believe that fiscal transfers have boosted rural household incomes and allowed rural consumers to raise their consumption levels. However, the macro feedback in terms of high and persistent inflation suggests that the boost to consumption growth will not be sustainable. Moreover, we expect the fiscal support to rural consumption to be gradually withdrawn.
…Signs of weaker rural consumption growth have already emerged. According to media reports (Business Standard), companies reported a slowdown in the rural sales of fast- moving consumer goods and household appliances in November, traditionally a good month for rural sales.”