Most, including DBS, expect modestly better growth in the US and Europe this year. In the US, fiscal headwinds have eased and consensus expects growth will rise to 2.6 percent from 1.8 percent last year. In Europe, many expect 1 percent GDP growth compared to minus 0.5 percent last year.

This can only be good for Asia. Exports to the US haven’t grown at all for two years and a small rise in the slope is expected in 2014. Exports to Europe have stopped falling and, with a little luck, this slope should turn modestly northward in 2014 too.

But caution is due. Markets have been overly optimistic on global growth in each of the past four years. And even if the fifth time’s a charm, the outlook is still for subpar growth in the US and Europe. Asia will still have to drive its own growth in 2014, just as it has done for the past five years. 

Things could be worse. In the five years since Lehman Brothers collapsed, Asia has “added” 1.25 Germanys to the economic map, right here in Asia. Even with China’s slower growth, Asia adds a new Germany every four years. That could drive its own growth used to strike many as preposterous. Today it’s conventional wisdom.

Consumption is key

Consumption is the bread-and-butter  driver of any economy, including  Asia’s.  Even with China’s high investment rate, consumption comprises 45 percent of top 10 Asian nations’ GDP, compared to 40 percent for investment. In most countries, consumption comprises a far higher proportion. More than anything else, where consumption goes determines where the rest of the economy goes — especially with China trying to put more weight on the consumer foot.

So how is consumption in Asia faring? Who’s growing? What’s growing? Can it be sustained? The short answer to the first question is, very well. China and Malaysia are leading the pack. On question 2, consumption baskets are changing every-which-way — as would be expected given Asia’s rapid growth and huge variation in income levels. In general though, healthcare, recreation and education expenditures are taking bigger share of household income while food and housing comprise a smaller part of the basket. Rising incomes allows Asians to spend more on things they want and less on things they need. Can it be sustained? Well, it has been for 60 years so the omens are good.

The big picture

Consumption in Asia continue to plow forward through the biggest global downturn in 100 years — and it did so without the help of the US, Europe or Japan.

In the five years since 2008, Asia’s consumption has grown by nearly 38 percent, an average compound rate of 6.6 percent per year. In the US, it’s grown by 7.5 percent in total in five years. In Europe, consumption today is still 1.5 percent below where it was in the third quarter of 2008. Growth rates are one thing, actual dollars of growth are another. How much has consumption grown by in Asia over the past five years? By nearly half a trillion dollars — US$477 billion to be precise, 2.3 times more than US consumption has grown by.

Consumption inside Asia

Where is consumption growing the fastest in Asia? In China and Malaysia, followed by the Philippines and Indonesia. Inflation-adjusted retail sales growth in China is running at nearly 12 percent per year. Total consumption growth is probably running at an 8-8.5 percent pace, given historical differences between the two series and current GDP growth of 7.6-7.8 percent. Even so, that’s four times faster consumption growth than in the US. 

Malaysia’s pace is Asia’s second fastest; real consumption growth there has averaged 7.7 percent year-on-year for the past two quarters. The Philippines and Indonesia are not far back (5.7 percent and 5.3 percent). Hong Kong and Singapore occupy the middle ground with real growth near 3 percent — roughly what would be expected given their high income levels. The standouts on the low side are India and Thailand — both have run into economic and political difficulty of late that threatens the outlook.

Dollars vs growth rates

When it comes to actual dollars of growth (as opposed to growth rates), there’s no question where the growth is coming from: it’s China. Absolute dollar growth depends on the size of the base and the  growth rate applied to it — and China takes first place in Asia on both scores. Of the US$477 billion of new consumer demand noted above that Asia generated since Lehman collapsed five years ago, China has accounted for US$317 billion, or 66 percent of it. That is, add up all the dollars of growth in all the other countries in Asia over the past five years — and China still delivered twice as many. It’s a pretty lopsided contribution scheme. One that will only grow more lopsided over time given China’s relatively faster growth rate and bigger base.

This isn’t to say that other countries haven’t generated much new consumer demand. They have. India generated US$71 billion of new consumer demand since the third quarter of 2008 — 60 percent more than Japan did over the same time frame. Indonesia’s consumption level today is US$475 billion. Put a 5 percent growth rate on that and you’ll generate US$24 billion of new consumer demand in 2014 — about what Japan will generate if its consumption is lucky enough to grow by 1 percent. South Korea should generate another 50 percent on top of whatever Indonesia does.

So there is, in fact, a lot of new demand being generated in Asia outside of China. It’s just that, in relative terms, China is so much more dominant. And, to repeat, China will only grow more dominant in the years to come.

What’s in the basket?

Where is Asia’s consumption basket headed? Pretty much every-which-way, as one might expect given the rapid growth and huge variation in income levels in the region. In general though, rising incomes mean consumers are buying relatively less of what they need and more of what they want.

In China, spending on healthcare, transportation and housing is pushing these basket shares north; food and recreation shares are falling. In fashionable Hong Kong, clothing is the big upward mover. Ironically perhaps, housing expenditures are falling in relative terms. In South Korea, healthcare and education shares are rising fastest. Everyone in Asia puts a premium on education but South Korea’s high income level makes it doable and few countries seem to put more stress on education than Korea.

Education and healthcare are also the top movers in Asia’s richest country, Singapore. On the surface, recreation appears to be rising but most of this is attributable to the new casinos and foreign money, not to local consumers. Ironically, given the seemingly never ending construction of high-end shopping malls, clothing’s share in the Singapore basket is falling. 

Recreation is Malaysia’s top mover, followed by spending in restaurants and hotels. Rising incomes are making this possible. Spending on housing is falling in relative terms as occurs in most countries with rising incomes. Thailand is the only country in Asia where food is taking up a larger share of the consumption budget. In Philippines, transportation — traditionally a “must-buy” item for low income consumers — is still moving north. Food, however, is moving south as would be expected. Food is also moving south in India, although it’s hard to highlight any single item that is taking its place.

Summary and assertion

Here we close with summary points and a claim that hopefully will tweak some interest in the note:

 Better growth in the US and Europe will help Asia in 2014. But Asia’s growth will be driven by Asia, as it has been for the past five years;

 Consumption in Asia continues to grow strongly. Over the past five years, Asia has generated 2.3 times as many new dollars of consumption demand than the US has;

 Consumption is growing the fastest in China and Malaysia; But China is where the dollars of growth are being generated. India, Indonesia and South Korea are important contributors but China dominates;

 Consumption baskets in Asia are moving every-which-way, reflecting the wide variation in per-capita incomes in the region and the wide variation in growth rates;

 In general, Asians are spending more on things they want and less on things they need. This follows from continued rapid growth in regional incomes;

 Many believe China’s consumption as a percentage of GDP needs to rise. It seems unlikely to occur in the near term. Consumption in most developing countries follows a U-shaped path, falling initially as rising incomes create surpluses that allow for savings and investment and then rising later as further income gains lead increasingly to spending on “wants” as opposed to “needs.”