Modest income redistribution adds $2 trillion to EU consumption

The growth in consumption has, for a long time, been the result of population growth and increased income for consumers within developed markets. Changes are afoot however, as population growth in many regions stagnates, the population greys and income dynamics shift between generations. Today, income inequality and rising costs in developed countries results in a growing class of non-consumers that are dampening global demand on one side, while older generations and new emerging generations become the growth engine. 

A new report by McKinsey Global Institute, the research arm of global management consultancy McKinsey & Company, titled ‘Urban World: the Global Consumers to Watch’, maps out the effects of decreased global population growth as well as income changes within economies in relation to changing consumption behaviour.

Population changes
The global population is aging rapidly over the next fifteen years. Particularly North America, Western Europe and North-east Asia will start seeing declines in age groups below 60, while those above 60 will appreciate quickly. In North America for instance, the 0-14 group will see 0.7% annual growth over the coming 15 years, while the 45-59 group will see an annual average contraction of -0.1%. The 60-74 and 75+ groups will grow by 1.9% and 3.9% respectively. In Europe the decline in population is even starker, where the 30-44 age group will decline by an average of -0.5% annually and the 45-59 group by -0.6% annually. The 60-74 group will increase by 1.7% annually while the 75+ group by 2.1%. While all of China’s age groups will continue to grow, the country itself is greying the most rapidly of those surveyed – with the average annual growth rates of 5.2% for the 60-74 group and 6.6% for the 75+ group.

Income not population to fuel consumption
Changes in demographics are about to radically change the consumption environment. As fewer new consumers join the urban consumption class, population growth becomes less and less of a source for consumption growth. Between 1970 and 1985 population growth was attributed to 55% of global consumption growth, while per capita consumption growth accounted for 45% of total growth. Between 2000 and 2015, with the rate of population expansion already slowing, the mix stood at 42% and 58% respectively. The declining growth in population across the world, bar sub-Saharan Africa, means that the mix will be reduced to 25% population growth and 75% per capita income growth. 

Consumption growth groups
As part of the research, the consulting firm also considers changes in consumption behaviour within different age groups, linked to per capita spending. A number of groups stand out, with particularly the older generations in North America and Western Europe generating consumption growth, as well as young urban Chinese.

The older generation in developed countries, those between 60 and 74 and the 75+ group, will generate 19% of global consumption growth and 51% of urban consumption growth in developed countries – for a total of $4.4 trillion, in the period to 2030. Particularly in Western Europe, this group will spend around twice that of all those aged below 60 in the given period. The retiring and elderly in developed economies today have per capita consumption of around $39,000 per year. In comparison, the 30-44 age group consumes on average $29,500 per year.

Another group that will contribute a considerable share of global consumption growth are China’s working-age consumers, those in the 15-59 age group. Middle of the road estimates for their contribution to total urban consumption growth is around $4 trillion, or 18% of urban consumption growth to 2030. By 2030, the number of consumers in this segment will grow by 20%, adding 100 million new consumers. Their average per capita consumption is expected to more than double from $4,800 per person annually to $10,700. According to the report, these consumers are so numerous and their incomes are rising so rapidly that they have the potential to reshape global consumption as the baby-boomer generation of the West – the richest generation in history – did.

US rising inequality
While baby boomers are set to enjoy their accumulated wealth throughout their golden years, with ever increasing consumption, the millennial generation is finding itself in a worse off position than the preceding generations. In the US, the millennial generation has an average income of $27,400 at the age of 27, well below the average of $31,600 enjoyed by Generation X at 27. Generation X remains, as they age, below the income levels enjoyed by the late boomers during the same period in their lives.

The research found that inequality is starting to seriously erode consumption behaviour, with many younger US workers more focused on repaying debt than buying products. In the US, the ratio of mean-to-median income for this age segment has risen from 1.10 in 1985 to 1.25 in 2013. Furthermore, the median net worth of the top 20% of young adult households in the United States in 2011 was eight times that of the other 80%; in 2000, that multiple was four times. 

European inequality
The story for Europe’s younger generation is even less rosy than that of the US. The younger generation, between 15 and 60, will add only 2.73% of the total new consumption. The report highlights that growing wealth inequality is creating a serious barrier for consumption growth in the region. The top 20% own 67.6% of the region’s total wealth, while the second quintile owns 20.4%. The bottom 60% of the population owns 12.1% of the total wealth.  

However, there has been a broad-based rise in inequality within most countries. Reversing this trend, so that income among the poorest in each country increases, would help strengthen overall global consumption growth. This means that transferring income or wealth from high-income to low-income households is likely to raise average consumption and aggregate demand. A 1% transfer of wealth from the richest to the poorest in Europe would see an additional €189 to €209 billion in consumer spending. A modest 10% transfer of wealth would not merely reduce considerable financial stress faced by many in the millennial generation, but also add around $2 trillion in consumption.