2011 definitely posed big hurdles to traders and retailers, with the Eurozone crisis spreading all over the world and shrinking consumer markets. With the first six months of 2012 behind us, we take a closer look at the situation in some major consumer markets.
Worrying Western Europe
Despite the efforts and different measures undertaken by individual countries and among the Eurozone, the situation is still worrying.
The Economic Sentiment Indication, the monthly survey developed by the European Commission, records a drastic drop in May 2012 for both EU (2.7 point drop) and the Eurozone (2.3 point drop), falling to 90.5 and 90.6 respectively. This reveals a big loss in confidence in all business sectors.
On the consumer side, though indicators for consumer confidence register a slight rebound (0.8 points and 0.6 points for the EU and the Eurozone respectively in the same period), the situation will likely stay rocky and unforeseeable for some European countries.
Spain and Cyprus officially requested bailout funds in June, not to mention long-troubled Greece, Ireland and Portugal. The European Union is crucial not only to these countries, but also to the unity and stability of the Union, as failure of any country could have a devastating impact on Europe, which will no doubt lead to political instability, fiscal contraction, unemployment and so on.
It is also noteworthy that, even though bailout funds can provide instant relief for these countries, the road ahead for the EU remains difficult. While the EU was set up to integrate participating countries, it has been criticised for not having well-structured architecture and some pivotal monitor engines in balancing power, growth and interests of member countries. These fundamental weaknesses are exposed by the Eurozone crisis and the EU will have to devote huge effort and resources to such improvements.
Given the volatile situation, consumers in Europe are going to spend less and more cautiously. The latest figures from Eurostat echo this pattern. Volumes of retail trade dropped by 1% in Euro areas including Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus and Luxembourg in April 2012, as compared to the previous month. When compared to the same month in 2011, an even higher drop of 2.5% stands out.
Alarms are still ringing for those eyeing Western Europe’s markets, perhaps even louder than before.
Polarized Eastern Europe
Depending on the reliance on exports and exposure to Eurozone banks, countries in Eastern Europe are experiencing polarized development.
Markets in central and south-east Europe that depend on export to Western Europe are being badly hit in this crisis. Hungary, for example, projects 1.5% negative growth on its own economy, and its consumer confidence has been negative for the past 20 months, according to Trading Economics. Other countries such as Croatia, Ukraine, Slovakia, Romania, Baltic States and Czech Republic are trapped in similar scenarios.
The situation is further worsened by the exodus of overseas capital and Eurozone banks, causing stringent limits on commercial and personal loans and mortgages. Business closure and job losses will be the result, largely and adversely affecting consumers’ power and willingness to spend.
Contrasting this, some countries that are less close to the Eurozone are showing exceptionally good performance.
Russia and Poland, the two expected to see the most solid growth, should be thankful for their lower attachment to the distressed zone. Russia recorded a 6.4% upside in household consumption in 2011, and is forecasted to grow by 4.3% in 2012, according to Business Monitor International. The consumer market in Russia is believed to be further stimulated after the country’s WTO entry, with a lowering of the average maximum import tariff from 10% to 7.8% as one of the membership terms.
In Poland, 2011 saw a rise of 4.5% and its GDP per capita reached US$14,000. The increase of disposable income has led to a rising middle class, which is willing to pay more on quality imports, offering in-roads to frustrated traders and retailers.
Hopes are high that the immunization of those few outstanding countries from the Euro plague continues.
Slightly surprising United States
Despite the strong headwinds from the Eurozone, the United States is giving a few soft surprises to the world.
Under the new quantitative easing (QE) measures by the US Federal Reserve, equity prices were raised, interest rates and the value of the US dollar were reduced. All these actually boosted consumer spending, particularly on big-ticket items such as cars and houses. Latest figures from the National Association of Realtors reveals that the pending home sales index climbed to 5.86 points in May 2012, projecting an optimistic house market in the US encouraged by low mortgage rates and property prices.
Traders and buyers will also be amazed by the positive consumer environment in the US. Consumers are increasing spending after probably painful but substantial pay-back of debts over the past few years. The financial obligations by the Federal Reserve, which calculates the proportion of required mortgage and credit card payments to disposable income, marked a historic low of 10.9% in Q4 2011. Such a rise in cash flow is definitely amazing to consumers, allowing them to spend more freely as pent-up demand for their long black-out. The US Commerce Department announced a rise of 5.3% in retail and food services sales in May 2012 as compared to the same month last year, showing a slowly recovering consumer confidence.
However, the US market is not an easy one for any buyer or trader to handle. US consumers are still struggling against high unemployment rates and are spending cautiously as a result. The slump of the Eurozone inevitably exerts high pressure on the US market as well.
The Presidential election coming in November will be an influential factor. Whether Obama succeeds in re-election or Romney leads Republicans back to the White House, policies on healthcare, military, housing, employment, taxation, foreign, etc. remain unknown to the market and so does settlement in the long term.
US outlook in the near future might be looking a bit cloudy, but at least no heavy rainfall is predicted.
China has been the strongest back-up for the consumer market in the past few years, but this might no longer be the case.
With a growth rate of 9.2% in 2011, China is expected to have lower growth in 2012, owing to appreciation of the Renminbi, and again, the Eurozone crisis, which lead to a decline in export and foreign investment.
Chinese government, recognizing that consumer spending accounts for 36% of GDP only, are trying to navigate upwards by boosting the domestic market. For example, first-time home ownership is encouraged by low interest rates and small down payments. This is clearly a good sign for traders and buyers who are in the home decoration, furniture and logistics industries. Another measure adopted by Chinese government was the rise in minimum wages in major cities. This substantially increases consumers’ purchasing power, producing positive signs for the market.
On the other hand, higher minimum wages bring in another problem for the Chinese government – accelerated drop-out of foreign investment and decline in manufacturing activities. Close-down of factories has already been observed in key industrial areas. This vicious cycle is rather ironic.
Social uncertainty is another negative for the consumer market. The much-argued One-Child Policy rides against economic development and labor shortage is cursing manufacturers who are already in a slump.
Last but not least, uneven wealth distribution is getting sharper and sharper, underlying higher and higher social unrest.
As such, even though Chinese people are believed to have abundant disposable income, thanks to their long-nurtured saving habits, their willingness to pay will be hit by the downturn in the economy.
China’s next steps need to be watched carefully.
Seriously ravaged by the earthquake in early 2011, Japan is slowly rejuvenating herself.
The Japanese Consumer Confidence Index (conducted by the Cabinet Office, Government of Japan), shows moderate but inspiring upward movement since the disaster. The index moved from 38.3 points in March 2011 to 40.7 points in May 2012. The rise clearly exhibits Japanese confidence in the consumer market. Positive trends have been recorded in industrial production and mild GDP growth is expected as well.
Traders and buyers should be astonished by the finding that in the post-disaster period, Japanese have still been very willing to pay for luxury items. In a research by McKinsey, less than 20% of Japanese interviewees were “less interested towards shopping for luxury goods since the earthquake and tsunami”. It was found that Japanese continue to be fond of items that will appreciate in value and cannot be passed down to future generations.
The electronic market is robust in Japan too. Recorded by GfK, one very outstanding item is the tablet market, in which there was drastic year-on-year growth of 130% in Q1 2012.
Getting to daily necessities, Japanese are very willing to pay for food and beverages from verified, organic or natural sources. This is somewhat a direct effect of the earthquake and tsunami, when food safety was almost devastated by nuclear contamination fears.
While the Japan consumer market is rebounding, high unemployment, especially among school graduates, plus an aging population, is holding the country back from a big turn-over.
Further undermining the situation is the disposal of the damaged Fukushima Nuclear Plant, and more importantly, Japan’s energy sources for commercial, industrial and household consumption.
Japan will do slightly better and better in the coming few quarters, but the road to full recovery isn’t clear.
Cautious South Korea
Exports account for more than half of South Korea's GDP and are getting weak in the major export markets – Europe, US and China. To alleviate the problem, South Korea initiated bilateral free trade agreements with China and Vietnam, and a trilateral free trade agreement with China and Japan earlier this year.
Although the new trade measures aim to promote exports and manufacturers, manufacturers are suffering from surging oil prices, as South Korea relies heavily on oil imports for almost all domestic demand. Higher oil prices inevitably push up manufacturing costs and eventually goods prices, making exports from South Korea unfavorable.
Apart from economic worries, South Koreans are actually finding themselves less able to spend because of extreme high household debt. South Korea's household debt stands exceptionally high at around US$800 billion, close to the country's annual GDP. The situation is sadly a result of a large amount of household investment in real estate, and it might take years for them to free themselves from mortgage payments.
The Consumer Confidence Index by the Bank of Korea released in June this year shows a dip of 3 points as compared to 105 points in May, reflecting the blues among South Koreans in response to a sluggish European market.
Both traders and buyers should exercise caution.
This giant country of 1.2 billion is a safe and stable shelter for world trade, finally.
With an average of 22% of exports against GDP from 2007 to 2011 (noted by the World Bank), India has stayed clear from the volatile world market. The situation is further aided as India's exports are more service-oriented than manufacturing-oriented.
India achieved a GDP of US$1,727,111,096,363 in 2011, a significant year-on-year increase of 25%. The growth in the economy and rise in household income are going to make large steps for India's consumer market.
India’s population structure contributes to the robust consumer market as well. Her population consists of a high proportion of young people, with about 50% of the population under the age of 25. Along with its economic development, India's literacy rate is also approaching 75%. This huge young and educated population constitutes the mighty consuming power of India.
Reports indicate that consumer expenditure in India will go up by 14% each year, reaching US$3.6 trillion in 2020.
Already retailers are landing in this new market, and gaining a good deal of profit.
Yet India can be tricky for both veterans and newcomers. The frequent changes in trade and labor policies are big obstacles for traders. One should be well prepared for unforeseeable and sudden changes in the business environment of this region.
Nevertheless, India is probably too alluring to resist.