Middle class currently beaten by tech

By Peter Lundgreen,

The Covid-19 crisis is delaying further growth in the global middle class, including the growth in the products that this consumer group demands, making the tech sector seem even more attractive to investors.

One of the mega-trends that I have pointed at since years is that the middle class will beat the tech sector. By that, I mean that the biggest economic global force is the additional 1.5 billion people, whose income will move up into the lower-middle class segment. Developments in the middle class and the tech sector are particularly interesting to confront in this comparison.

The tech sector is exciting and attracts investors, while the products that the middle class demands tend to be considered as “boring” sectors among some investors – I expect the mega-trend to continue, but at a changing speed.

Almost the whole global move-up in the middle class is expected to take place in Asia, and this is not changing immediately. The development is delayed, perhaps up to another two years, and even longer in some countries. In China, the economy has come back on track so quickly, that the economic damage will be limited, especially if the country manages to keep Covid-19 away from the door.

One of the countries where there is a risk of delayed development for hundreds of millions of people is India. The country’s GDP growth fell more than expected in the second quarter, though it is not the biggest challenge. The problem existed before Covid-19 was even a concept, namely that the GDP growth dropped to a level too low back then, and getting economic growth above the previous level will be the big challenge once the crisis is under control.

Other Asian countries are also still economically challenged, such as Indonesia, which with its 280 million inhabitants, many aspire to move into a higher income class. But the country’s consumer confidence does not look encouraging, though the GDP growth is far from as affected as in India. I expect Indonesian consumers to regain faith in the future sooner, as the economy has a good chance of getting back on track.

My current assessment is that the 1.4 billion people that the middle class was expected to grow with in Asia, measured by income, is delayed by one year in China, two years in the rest of the Far East, and longer in India, which means that in 2032, Asia will have one billion more people in the lower-middle class. It’s a big number, but less than expected from 12 months ago, however, growth in the Far East may surprise positively and advance ahead of the revised estimate.

The tech sector is also being challenged, though for other reasons. For years, the EU has had the big American tech companies under observation for many reasons; lately it was Amazon that came into the spotlight.

Tech giants are also increasingly involved in the important infrastructure for data traffic under the Atlantic. The new core cables are now primarily owned by Google, Facebook, Microsoft, and Amazon, some of the same companies who were behind the idea of ​​the new global currency Libra.

This dominance is causing European leaders to resist the development of even bigger tech giants. Quite interesting is a similar political stance developing in China, simply targeting the country’s own tech giants. The blocking of Ant Financial two days before the world’s largest IPO was to run off the stack says a lot, and two weeks ago, the Chinese government has been on the warpath against tech giants, specifically the fintech sector.

In my opinion, there is no doubt that the political leadership in several of the largest countries in the world now has a reservation against the dominance of the tech giants. This gives investors the risk that the giants may be forced to reduce their own size.

The situation a few years from now could be that both households with lower-middle-class incomes and the global tech giants feel a kind of headwind. In the long run, however, it is my assessment that the tech giants will become even bigger and more dominant.

The number of lower-middle class households may, for another reason, experience growth due to the worldwide Covid-19 crisis. Unfortunately, this phenomenon is due to the fact that some current middle-class incomes are affected by a decline in income.

I expect the crisis to lead to persistent changes in consumption patterns. Most striking is the increasing turnover in online sales/e-commerce, which has the consequence that store employees with a certain education lose their jobs, and replaced by unskilled labour, or robots, working in logistics and transport.

This is the development that has been behind the growth of the lower-middle class in the United States (measured by income) for a number of years, that is a downward movement in household incomes.

Overall, the Covid-19 crisis accelerates the trend that the global middle class itself is coming under an increasing income pressure and will probably shrink. In contrast, the lower-middle class will continue to grow.

This gives a smaller demand for products that households in the average middle-income class would normally demand, while products demanded by households in the lower-middle class will continue to increase. This is in line with my expectation that the crisis will reduce global GDP growth, primarily due to an overall decline in consumption among middle-class incomes.

Peter Lundgreen is the Founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment & finance. Peter is an international columnist and speaker on topics about the global financial markets.

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