Reasons to be (cautiously) optimistic

The global economic outlook has improved since the start of 2023, despite Russia’s ongoing war in Ukraine, the fallout from Covid-19 and associated cost-of-living pressures for much of the world, in addition to the looming threat of climate change. Having repeatedly downgraded its growth forecasts in recent times, the International Monetary Fund (IMF) took a slightly more optimistic view in April, predicting that real GDP growth would bottom out at 2.8% in 2023 before rising modestly to 3% in 2024.

Energy and food prices have fallen in recent months and headline inflation is projected to fall as a result, from 8.7% in 2022 to 7% in 2023[1].

China looks set to rebound after relaxing its zero-Covid policy and reopening its economy, ripple effects of which are boosting the economies of its neighbors and helping to ease the bottlenecks that have choked supply chains in recent years. And the World Health Organization (WHO) announced in May that it no longer considered Covid-19 a public health emergency of global concern.

Consumer confidence has also turned a corner, cautiously climbing from the rock-bottom levels we saw in 2022. This is particularly the case in Europe, where our Consumer Climate data shows a plateau after a steady downward trend from late 2021 to late 2022.

Reasons to remain cautious

Dampening the improved global economic outlook are the headaches from the last three years––the ongoing, compounding and destabilizing events summed up in 2022 as the ‘poly-crisis’.

Russia’s war in Ukraine continues to cost lives, displace people, polarize people and cause disruption to global markets in its second year. Although food and energy prices have dropped in recent months, they remain at high levels. Core inflation remains stubbornly high, which does create more risk of the world economy entering a recession, although chief economists are evenly divided on how likely this is in 2023.

The war has also split world economies down geopolitical fault lines, reinforcing barriers to international cooperation.

As for the Covid-19 crisis, the economic impacts will be with us for some time. Beyond the trauma of some seven million deaths, these impacts include increased global inequality, poverty, government debt and labor shortages. As a result of pandemic-related supply chain disruptions, a massive restructuring is underway as firms diversify their suppliers and production hubs.

Stagflation risk grows

The World Economic Forum’s Chief Economist Survey shows a greater degree of optimism about economic growth at the halfway point of the year than there was in January. Those expecting ‘weak’ or ‘very weak’ growth for Europe has reduced from 100 in January to 75 in May. Meanwhile, those predicting ‘weak’ or ‘very weak’ growth for China has fallen from 48 in January to only 3 in May, showing a remarkable turnaround. However their anxiety about persistently high inflation has grown. Core inflation, excluding the volatile food and energy components, is falling more slowly than anticipated, raising the prospect of stagflation.

For example, in January, 91% of respondents to the World Economic Forum’s Chief Economist Survey thought that the United States would experience weak economic growth in 2023 whereas by May this had fallen to half. However, almost 70% now expect high inflation in the US compared with fewer than 25% back in January. The vast majority of chief economists think central banks now face a trade-off between ensuring liquidity and maintaining financial sector stability. A similar proportion believes central banks will struggle to reach their inflation targets. The concerns have transitioned from primary areas of food, energy and day to day purchases, to secondary areas like financial and labor markets

Emerging countries are the global engines of growth

Emerging regions are expected to outperform developed regions by some margin this year, with growth rates (Q4 over Q4) jumping from 2.8% in 2022 to 4.5% in 2023.[2]

Vietnam and Thailand are expected to perform well among emerging countries. Meanwhile, China and India alone are projected to drive half of global economic growth this year, providing fertile ground for brands worried about the lackluster prospects of advanced economies.

Despite the high growth potential now expected for China, back in January 2023 half of chief economists had only moderate growth expectations for the country. Its real estate crises, tight labor markets and tensions with the US, coupled with the hangover from its zero-Covid policy were cited as reasons for their moderation. However, as we approach the middle of the year, there is near unanimity that China is bouncing back.

Chinese consumers saved one-third of their income last year, compared with only 17% of their earnings before the pandemic. Hopes of these household savings fueling a rebound in Chinese demand caused France’s stock market to surge to record highs in April as investment poured into luxury brands Hermès, Kering, LVMH and L’Oréal.[3]

Meanwhile, India marked a major milestone in 2022 when it overtook the UK to become the world’s fifth largest economy. The upcoming superpower also stands out in 2023 as the only country where consumer confidence has improved since 2021. Whereas 62% of consumers in Brazil believe now is the time to hold off from making purchases––a pessimism echoed by Japan––we see a marked distinction in India, where 31% of consumers believe it is a good time to buy.

Affluent Indians cushioned from cost-of-living pressures are driving demand for premium consumer products, alcoholic beverages, and devices, which explains why the technical consumer goods market is showing a clear upward trend, growing by 31% in local currency at the end of 2022 and with relatively modest inflation of 5.7%.

Advanced economies stuck in the slow lane

Advanced economies are the stragglers in 2023, predicted to grow by just 1.3% this year, less than half last year’s rate.

Europeans are heaving a sigh of relief after a mild winter moderated their gas consumption, allaying if only delaying another energy crisis that could tip countries into recession. This partly explains why, according to the WEF Chief Economists’ Outlook for May 2023, only 6% of chief economists expect very weak growth on the continent in 2023 compared with 68% at the start of the year.

However, other factors cloud the economic outlook. The pace of job growth has slowed in North America and Europe, while the recent tightening in global financial conditions is hampering the G20’s monthly wage growth, which, in the first half of 2022, fell into negative values for the first time in the 21st century. It means cost-of-living pressures will continue to impact households until at least the end of 2023.

The collapse of three US banks and one Swiss bank in March has added to the jittery atmosphere on both sides of the Atlantic, with more than two-thirds of chief economists saying they expect to see further bank failures or other serious financial disruptions in 2023. Most think this will make bank lending more difficult to secure and slow down investment in the technology sector.

Consumer behaviors and values continue to evolve

More than three-quarters of chief economists expect the cost of living to stay at crisis levels in numerous countries throughout 2023. But by combining an understanding of universal long-term trends with knowledge of how different customer segments are responding in different geographical regions, brands can unlock opportunities for growth.

For example in the Tech and Durables market, there are a number of macro trends that are influencing consumer purchasing decisions around the world:

1. Simplicity drivers such as smart and multifunctional products that make people’s lives easier have universal and consistent appeal, especially in the tech and durables market. An example would be built-in kitchen hobs with integrated hoods, sales of which jumped by 12% in Q1 2023 vs Q1 2022, or robot vacuum cleaners with wet and dry extraction docking stations, which grew by more than 100% over the same period.
2. High performance, high quality products that allow you to be mobile, work efficiently and enjoy a healthy lifestyle remain attractive. Examples include Bluetooth keyboards, which grew 14% between Q1 2022 and Q1 2023, and hot air fryers, which grew by more than 75% in that time frame.
3. Sustainability is of growing importance, both for conscientious, affluent consumers and those needing to shop more efficiently. Durable and energy-efficient major domestic appliances that deliver cost savings over the long run are resonating with consumer anxiety about high energy prices.
4. Individualism is emerging as a key purchase driver. Customers increasingly expect brands to understand their circumstances and tailor experiences accordingly. In the FMCG sector, in particular, this has created a massive opportunity to use digital loyalty scheme data to offer personalized promotions and offer people product suggestions based on their previous buying habits.

Consumers in emerging/growth regions

Despite these high level trends, there is still a large amount of regional variance in consumer behavior. Led by India and China, emerging regions offer pockets of growth in a challenging year as their burgeoning middle classes make up for ground lost during the pandemic and seek out aspirational products.

Brands and retailers have everything to gain from keeping up with China and India’s digitally native youth who are driving the worldwide adoption of digital wallets and contactless payment.

Countries like India, Brazil, Philippines, Thailand and Greece either grew or declined marginally (much better than most countries) in the first four months of 2023 in comparison to advanced economies. This is partly due to a low baseline of consumer durables sales from the previous year coupled with low penetration for tech and durable goods. The expanding middle classes in these countries, with increasing disposable income, are also a key contributing factor for this sustained growth despite otherwise challenging economic conditions. Meanwhile, UAE and Saudi Arabia have seen a growth dynamic due to the resurgence of the oil economy and tourism.

Consumers in advanced economies

In advanced economies such as Western Europe and Developed Asia, brands need to cater for an increasingly polarized consumer base.

At one end of the spectrum, four in 10 Europeans[4] are relatively immune to cost-of-living pressures. Innovative, well-designed, and aspirational features and brands are important to gain traction with this financially comfortable group. They also have the spending cushion to focus on wants such as being eco-active and health conscious. The boom in hot air fryers, which use less fat than conventional deep fryers, chimes with their appetite for both healthy products and new ways of doing things.

Despite market decline and premiumization broadly taking a pause, aspirations to buy premium products have not completely waned. It is still relevant in select hero segments and in certain regions. Hence it’s crucial for brands to use strategies rooted in data. To preserve consumer loyalty, brands also need to emphasize the superior values, product quality and uniqueness of their products.

Meanwhile, six out of 10 Europeans are feeling the pinch. Budgeteering is the name of the game for this group, who are using a range of cutting and coping strategies to make their money go further, including shopping around for the best deals and holding off purchases in the hope of catching special offers or switching segments

It means a strong promotions strategy is more important than ever, including an understanding of the seasonal promotional events that matter to consumers in different parts of the world. Personalized promotions and product suggestions are another increasingly important way to engage with individuals.

Conclusion

While economies around the world are showing signs of stabilizing, the path ahead is not without obstacles. Inflation is still chipping away at disposable incomes, the ongoing war in Ukraine is continuing to disrupt supply chains and displace people, and the risk of recession remains real.

In this environment, brand strength will play a crucial role in winning over reluctant consumers. Savvy promotional strategies, tailored to the differing priorities of consumers across locations, and innovative products that offer superior performance could also help brands to gain ground against competitors. As ever, businesses that are quick to identify, understand and adapt to ever-changing consumer sentiment will have the edge in navigating the rocky road to recovery.

Speak to gfkonsult today to find out how we can help you prepare for any eventuality.

Author

Nevin Francis

Director Strategic Insights at GfK

Read more from Nevin Francis