Preparing for a bumpy ride: why businesses need to be flexible and patient to win in emerging markets

13 February 2017

While the megatrends are inherently long-term in nature, they don’t always move in straight lines. In relation to the shift in global economic power to emerging markets, for example, the experience of the last couple of years has highlighted the political and economic volatility that we are always likely to see in these markets as they evolve and mature. And, of course, Brexit and Trump have shown that this political volatility is also increasingly evident in leading advanced economies.

So should we throw away our long-term economic projections? I think not. As we argue in our latest World in 2050 report, the fundamentals of demographics and technology-driven productivity catch-up are still likely to propel China, India and other large emerging markets up the global GDP rankings over the coming decades, even if there are a few bumps in the road along the way.

Of course these bumps can feel pretty nasty at the time, as illustrated by the effects of the sharp fall in oil and other commodity prices between mid-2014 and early 2016 (though they have recovered somewhat since then). This has, together with some political uncertainty, pushed Brazil and Russia – two of the high-flying BRICs during the first decade of this century – into severe recessions in 2015-16 from which they are only just starting to emerge.

Other large emerging economies like Nigeria (oil and gas) and South Africa (coal and metals) were also hit hard by this commodity price downturn. Our World in 2050 analysis suggests that Africa still has great long-term growth potential, but lower commodity prices have highlighted the need for more diversified economies with a greater focus on industry sectors with strong job-creating potential for their relatively fast-growing young populations. The same is true for many other emerging economies in regions like the Middle East and Latin America.

As a net commodity importer, China is in a different category. But its previous breakneck GDP growth rate has also eased from around 9-10% to around 6-7% over the past five years. This has coincided with (and relates to) a rebalancing of its economic growth model from reliance on exports and capital investment towards domestic consumption and services. One consequence of this has been lower demand for imported commodities, which has been one important factor behind the recent problems in commodity-exporting economies.

Longer term, we expect a further slowdown in China’s growth rate as its population ages, although its share of world GDP is still likely to rise for some time, reaching around 20% by 2030 according to our 2050 report. This would put China ahead of the US as the largest economy in the world on any measure of GDP. 

India’s economy, in contrast, has actually picked up speed over the last few years. Various factors have contributed to this, including its status as a net importer of cheaper oil and other commodities and, since 2014, a new government that has been introducing more business-friendly policies to stimulate growth. Based on our long-term global model, we think that India could replace the US as the world’s second largest economy by 2050, providing it can sustain momentum on investment in infrastructure and education (particularly for women and in rural areas) and on institutional reform, including cutting red tape.

Implications for business strategy - winning in emerging markets

To succeed in fast-growing but potentially volatile emerging economies, international companies will need dynamic and flexible operating strategies, as discussed in detail in the latest annual report of PwC’s Growth Markets Centre. Businesses should be prepared to adjust their brand positions and product features to suit differing and often highly nuanced local preferences. An in-depth understanding of the local market, consumers and policy regimes will be crucial, as will choosing the right local partners to work with.

Another key message from this research is that international businesses and other investors need to be patient enough to ride out the short term economic and political ups and downs that will inevitably occur from time to time in emerging markets as they move towards maturity. But our long-term global projections make clear that businesses that fail to engage with these markets will miss out on the bulk of the economic growth we expect to see in the world economy over the coming decades.

To find out more about this megatrend of shifting  global economic power, please visit our dedicated  megatrends website.

John Hawksworth | Chief Economist
Profile | Email | +44 (0) 207 213 1650

 

More Megatrend matters articles by John Hawksworth

Twitter
LinkedIn
Facebook
Google+

Comments

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been saved. Comments are moderated and will not appear until approved by the author. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Comments are moderated and will not appear until the author has approved them.