It may not feel like it in South Africa, but a fundamental economic shift is taking place in the wider emerging-market world. We need to take ourselves out of the local negativity to see what is really happening. Since the beginning of the year, emerging markets have become the engine of global growth and the new opportunity presenting itself is that this growth can be more inclusive.
Since the turn of the century emerging markets have enjoyed strong and synchronised growth. This was driven by their markets opening, excess liquidity, rising foreign direct investment, booming trade, robust commodity prices and confidence. In 2007 - the year prior to the financial shock of the Lehman Brothers collapse - more than 100 developing economies were growing at over 5%. Today, this growth rate is almost unimaginable.
This supercharged and clearly abnormal growth trajectory was disrupted in 2008 and came to a rapid end in 2013, when the US Federal Reserve began rolling back its quantitative easing stimulus and when China's resource-intensive infrastructure spend stimulus was largely exhausted. The golden growth decade for emerging markets came to an abrupt end.
The past three years have been tough on two categories: those that are price-taking exporters of commodities; and those that suffer the economic cost of poor political governance. But the cycle is now turning.
Since the beginning of the year there has been a U-turn in the overall performance of emerging markets, although they are not all created equal. Considering the self-inflicted economic wreckage in Brazil and Russia - not to mention Angola, Egypt, Nigeria and Venezuela - this may seem an overly positive view.
Beyond the negative news in recent years, there is now a real boom in middle-class consumption in key emerging markets that is creating new opportunities for employment, corporate profit and economic growth in the global economy.
Middle-class spending
Over the next decade, a sizable increase in middle-class spending power will become visible. We project an increase in middle-class spend of $9.1-trillion (about R117-trillion) between now and the end of 2026 in eight emerging markets - Brazil, China, Egypt, India, Indonesia, Mexico, Nigeria and South Africa. The bulk of this expanding spend in emerging markets - 90%, in fact - will be concentrated in just three countries: China, India and Indonesia.
Last year was beset with negative news around global economic forecasts and the rising trend of inequality in the developed world. Persistent negativity has eclipsed the reality of the coming emerging market "demand shock". Unlike recent shocks in the global political economy, this is one to be welcomed for its potential to contribute to growth and new economic opportunity.
What's driving this demand shock?
In essence, we have reached a watershed in the industrialisation of a number of leading emerging markets. GDP has risen to the point that mass labour-intensive manufacturing is going to deliver fewer and fewer benefits - simply because there is less low-wage labour that makes such manufacturing economical. This is true of China and many other emerging markets, with the possible exception of South Asia and Africa.
The shifting value chain of production in China and its neighbours holds potential for low-cost manufacturers elsewhere. The rising cost pressures on China's light industrial manufacturing sector are leading manufacturing capacity to relocate to lower-cost destinations.
Justin Lin, former chief economist of the World Bank, calculates that China could lose up to 85million jobs in the next decade or so due to rising production costs.
As this shift in production out of China's southeastern provinces takes place, there is a prospect for other developing countries to emerge as new Vietnams - lesser-cost destinations for manufacturing investment.
Ethiopia is the best candidate to assume this role in Africa. It is now able to compete with China and Southeast Asia to attract low-end labour-intensive manufacturing. This is incredibly important as there is no sector like manufacturing that expands value and supply chains, creates secure jobs and diffuses wealth throughout a society.
There are two key drivers of the coming demand shock: rising wages in China that drive faster growth in household income and spending; and rising employment in labour-intensive manufacturing in countries to which China's low-end manufacturing is being relocated. These drivers are mutually reinforcing, and together are creating a new wave of consumer demand in these emerging markets.
China's growth model is rapidly shifting from state stimulus to services and consumption. It is forecast that by 2030, 19.7% of the population will be in the upper-middle-income bracket and high-income individuals will make up 14.5% of the population. This will result in significant increases in domestic consumption spend.
The outlook for the rest of Asia is also strong. Growth across Southeast Asia is forecast to top 5% through 2030. The bookend economies of Southeast Asia - Indonesia and the Philippines - are finally realising their growth potential, with the former likely to surpass the $1-trillion GDP figure this year.
Economic activity
India's growth remains robust - the Organisation for Economic Co-operation and Development, IMF and World Bank are all predicting growth to be about 7.5% next year. Growth is likely to accelerate in most economies in Asia, supported by strong domestic demand as disposable income levels increase. The rise of this new Asian middle class will have huge implications for economic activity.
Investor sentiment towards emerging markets is now positive. This contrasts with the subdued growth prospects of developed markets. This year the IMF forecasts emerging markets to grow by 4.5% compared to 2% in developed markets. Quoted in the Financial Times in July, Pictet Asset Management's index measuring emerging market consumer confidence indicates that it has risen to its highest level since 1993. Robust or broader economic growth across most emerging markets - South Africa being an exception - is resulting in rising consumption.
While developing states can - with the right enabling policy framework - take advantage of this macro trend by creating domestic conditions to attract foreign direct investment into their manufacturing sectors, the global economy will benefit from increased tourist flows as well as the rapidly increasing demand for services from Asia.
Outbound tourism spend by the emerging middle class will create massive employment opportunities in the hospitality, transport and retail sectors. The staggering increase in Chinese tourists travelling and spending abroad is arguably among the mega economic trends of our times.
Last year, 135-million Chinese travelled abroad, spending $261-billion, the highest source market globally since 2012. It is forecast that this figure will reach $429-billion in 2021.
Services-driven route
The services economy is complex and more difficult for public policy to cater for considering the traditional focus and reliance on physical resources and manufactured goods. Perhaps the emerging-market middle class will enable a new services-driven route for economic growth for developing states. Services no longer play just a supportive function but have become an export in their own right.
Our calculations are based on conservative estimates of what the demand shock will be. There could be an even more significant expansion of this global emerging-market middle class if citizens are enabled to start their own businesses, especially if these are in the formal sector offering better-paying jobs that contribute to middle-class demand.
One way to start is by looking at measures that improve the ease of doing business and offering better protection of property rights for micro-entrepreneurs. This would allow them to create bankable assets. The long-term successful economies will be those that adopt pro-growth reforms that are implemented in a pragmatic and inclusive way.
• Davies is MD of emerging markets and Africa at Deloitte, and Hedrick-Wong is chief economist at the MasterCard Center for Inclusive Growth
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