4 August 2014

Rapid-growth markets to see transformation in 2015

While the world needs to get used to a slower pace of growth across rapid-growth markets (RGMs) relative to the past decade, EY says a gradual recovery will see growth above 4.5% in 2015. 

According to EY’s latest Rapid-Growth Markets Forecast (RGMF), a quarterly forecast for 25 markets that are becoming more important globally in terms of their overall weight in the world economy, RGMs have recovered somewhat from the financial turmoil in the second half of 2013 and early 2014, and a fast-growing population, strong investment rates and the rapid adoption of technologies, will continue to grow rapidly over the medium term.

Political challenges exist in some economies; instability in Iraq has brought geopolitical risks to the fore and put pressure on oil prices. On the other hand, in economies such as India and Indonesia, new political leaders with strong credentials in governance have recently come to power and must now usher change for accelerating growth.

Rajiv Memani, EY’s Chair of the Global Emerging Markets Committee comments:
“While near-term growth in several emerging economies hinges on the political will to implement second generation of reforms; in the medium term, fast-growing populations and increasing productivity are expected to lift growth, with cities especially in Africa and Asia, expected to be the epicentre of this growth.”

According to the report, the economic output of China’s 150 largest cities will triple from US$8 trillion today to US$25 trillion by 2030. China’s urban development plan, highlighted in March by the Chinese government, puts the urban consumer at the heart of its development, with targets to improve rail infrastructure, reduce emissions and ensure its cities are fit for the next generation. A faster adoption of green technologies in China has the potential to lift its growth by 0.7% per year on average from 2025 to 2030.

The growing number of lower-middle income households with some disposable income is set to exceed 30 million by 2030 in Africa and South Asia – with incomes above US$5,000 but below US$10,000 in Africa and India. This growth will help to create markets of scale for mobile phone airtime cards and other consumer goods and services.

Exponential growth

It is estimated that by 2030, China and Indonesia will have more than two-thirds of the population living in cities. By this time, 40% of the 50 largest cities in the world (based on GDP by consistent prices) will be in China. Outside of China, Jakarta and Istanbul will rank among the world’s top 20 cities in terms of economic output.

There will also be tremendous shifts within sectors in RGM cities. Manufacturing will expand in cities with more space to grow, whereas financial services will accelerate in cities such as Beijing and Mumbai. Industrial output in more space-constrained cities such as Hong Kong, Shanghai, Seoul, and Bangkok, with relatively more expensive land and labour costs, will grow much more slowly than in cities like Jakarta.

Demand for health and education

Varying demographic trends in cities across the RGMs bring challenges and opportunities. For countries such as South Korea and China, it is estimated that there will be fewer than five workers supporting each elderly person by 2030. In contrast, it is estimated that in India and Indonesia, there will still be almost 10 workers for each elderly person.

For all the RGMs, this presents a challenge for the provision of urban public services. Mumbai’s working age population is forecast to expand by a third by 2030, while Tokyo’s will shrink by 7%.

Aging populations will add to pressures on health services in South Korean cities. In addition, rising pollution and congestion is a serious concern in many Asian cities.

Memani concludes: “Investments are crucial to sustaining the demographical and industrial trends across rapid-growth markets. In our view, RGMs that demonstrate the political will to move ahead with second-generation reforms to attract investments in infrastructure, offer stability and predictability in their rules for doing business and take tough measures to achieve macro-economic balances can see a growth dividend in the future.”