Global Middle Class Has Shrunk in 2020?

One of the most economically significant developments in the past decade is the emergence of a global middle class. The expectation that this cohort of consumers would continue to grow relentlessly, as rising incomes in developing countries lifted millions out of poverty each year, has been a central assumption in multinationals’ business plans and the portfolio strategies of professional investors.

For the first time since the 1990s, the global ¬middle class shrank in 2020, according to a recent Pew Research Center (“Pew”) estimate. About 150 million people—a number equal to the populations of the U.K. and Germany combined—tumbled down the socioeconomic ladder in 2020, with South Asia and sub-Saharan Africa seeing the biggest declines.

Pew, which has been researching the topic for more than a decade, labels as middle income those making from $10.01 to $20 a day, using data that smooth out differences in purchasing power across countries. In Pew’s analysis, there’s a separate ¬upper-middle-income band made up of those earning $20.01 to $50 a day. 

Taken together, Pew’s middle-income and upper-middle-income brackets encompass roughly 2.5 billion people—or a third of the world’s population. China, which by Pew’s definition is home to one-third of the world’s middle class, appears to be recovering quickly, but many other developing countries face diminished economic prospects.

As in other countries, India’s poorest have borne the largest share of the economic pain from the coronavirus crisis. The downturn has also wiped out scores of white-collar jobs such as engineers and teachers. About 21 million salaried workers lost their jobs between April and August of 2020, according to the Centre for Monitoring the Indian Economy. India’s middle class shrank by 32 million people in 2020, accounting for 60% of the worldwide drop in the number of people earning $10-$20 a day, according to Pew Research Center estimates. The reversal looks like the largest India has seen since it began liberalizing its economy in 1991.

The ripple effects have been particularly visible in India’s automobile sector, which is the world’s fourth-largest and accounts for half of the country’s entire manufacturing output. It saw a fall in vehicle sales of more than 18% in the 12 months through February.

In its latest World Economic Outlook, released in full on April 6, the International Monetary Fund predicts the global economy in 2024 will be 3% smaller than it would have been without the pandemic, largely because developing world governments have less room to spend their way to recovery, as the U.S. and Europe are doing.

The divergences are stark. India will end 2021 with a gross domestic product that’s 5.2% smaller than it would have been otherwise, according to forecasts by Bloomberg Economics. Indonesia’s output will be 9.2% smaller than its pre-crisis trend foretold. The U.S.? Just 1.6% smaller.

Carmen Reinhart, the World Bank’s chief economist, worries we’re just starting to get our heads around the second-order economic effects of the pandemic and that a rebound in growth rates is being mistaken for a lasting recovery.

Immunizations are proceeding far more slowly in poorer countries that have yet to gain the same access to vaccines as the rich world has. But it goes further than that. In many emerging economies, Reinhart says, banks are wondering whether a surge in lending to consumers and small businesses in years before the pandemic will come back to bite them. She’s worried that lenders will curtail credit, which could delay the economic healing.

Reinhart is also concerned that in some countries governments may be forced to switch into austerity mode prematurely because they can’t shoulder their expanded debt loads. And while inflation is muted in the U.S. and Europe, in places such as Brazil food prices are soaring, which is leading central banks to tighten monetary policy prematurely. The global economy is “bifurcating,” she says. “This has been a very long year, and I think the damage has been underestimated.”

What about Malaysia? We have 20% more in the B40 group because of the pandemic and it will take longer for unemployed and under-employed folks to find suitable jobs. Meanwhile, we worry about non-essential issues like race and religion!

Reference:

An estimated 150 million slipped down the economic ladder in 2020, the first pullback in almost three decades,  Shawn Donnan, Vrishti Beniwal, Marisa Wanzeller, Shannon Sims, Prinesha Naidoo, Randy Thanthong-Knight, Suttinee Yuvejwattana, Phil Kuntz and Michelle Jamrisko (https://www.bloomberg.com)