One of the most economically significant trends of the past few decades has been 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.
You can now add that to the list of economic truths that have been upended by this pandemic. For the first time since the 1990s, the global middle class shrank last year, according to a recent Pew Research Center estimate. About 150 million people—a number equal to the populations of the UK and Germany combined—tumbled down the socioeconomic ladder in 2020, with South Asia and sub-Saharan Africa seeing the biggest declines.
The Developing World’s Shrinking Middle
Defining the parameters of this global middle class has long been a contentious exercise. 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. (Note that $50 per day falls shy of what a minimum wage worker in the U.S. takes home pretax for an eight-hour day.) Others, such as the Brookings Institution, have opted for a more expansive $10 to $100 a day definition.
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. Buried inside these big numbers are many personal stories. Here we bring you four, from India, Brazil, South Africa, and Thailand. They’re tales of hard-won successes that evaporated overnight, along with well-paying jobs. Of once-accessible luxuries, like steak for dinner or home internet access, now out of reach. Of dreams deferred, whether an automobile or an apartment.
Strivers face a far more uncertain future than in years past. 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.
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 per cent 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 US 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 per cent smaller than its pre-crisis trend foretold. The US? Just 1.6 per cent 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.
Immunisations 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.”
Data from Conab, the national agricultural agency, shows that residents of Brazil, the world’s No. 1 exporter of beef, are eating less of it. Per capita, beef consumption fell 5%, to 29.3 kilograms (64.6 pounds) in 2020, its lowest level since 1996. At the same time, consumption of eggs rose 3.8 per cent, hitting a new high, according to official data.
Another study showed that many other South Africans found themselves without a job. Nationwide, the vacancy rate rose to a record 13.3 per cent in the first quarter of 2021 from 7.5 per cent a year earlier, according to TPN Credit Bureau. Most of the pressure has been on units that rent for about $475 a month or less, which account for two-thirds of the formal market.
The ripple effects of the pandemic 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 per cent in the 12 months through February.