What a shrinking middle class means?

And what it means to your business.

With so much discussion of a rising middle class in China and other developing countries, how could the middle class be shrinking? In terms of absolute numbers, it isn’t. However, in Europe, the U.S., Canada and other developed economies, that is exactly what’s happening. This and other shifting demographics are reducing consumer demand for goods and services in developed economies around the globe.

Millennials have good reason to believe they will experience less opportunity for economic advancement compared with their parents. These factors are dashing hopes for a better, more secure economic future and fueling growing political instability as we can see this election year.

That is a sharp reversal of several hundred years of an improving quality of life in the West. Governments are being blamed for this recent development, when, in fact, these changes are most strongly linked to the disruptive effects of the Third (digital) and Fourth (biogenetic) Industrial Revolutions.

As stated in previous Insights articles, less demand combined with more Artificial Intelligence-generated software and robotic development have undermined jobs. Other factors include an aging population that consumes less and, just as importantly, there has been a dramatic shift away from cultural norms that until recently encouraged high levels of consumer consumption.

On a more positive note, if your business provides products and/or services for the elderly, for industries providing for on-going, continuous life needs (e.g., non-durable goods), for health industry products/services, etc., you’re in secure territory.

New middle class economies are not performing according to expectations

Across the developing world, governments came to power promising greater prosperity. Many of them delivered, but generated a revolution in rising expectations that has been hard to satisfy. Governments, in many cases, are less well funded because citizens want lower taxes while, at the same, time expect better public services, a fix on corruption and greater personal security/Internet privacy at a time when digital connectivity makes that all but impossible.

So, it isn’t just the U.S. electorate that has is angry, but also the populations of countries like Brazil and Turkey that until recently experienced dramatic economic advances.

Changing definitions of the middle class

Again, measures of daily income, translated in terms of purchasing power for people in different parts of the world indicate that the middle class is growing, especially in China. Whether the demarcation point is defined roughly as $50 or $ 100 day –upward mobility there and in other developing parts of the world still prevails. Using that and other rough measures, the number of middle class people around the world increased within the decade from 2001 to 2011 by 70%, to 1.4 billion. Of course, the biggest driver of this change has been China.

While Africa has seen some of the greatest declines in poverty rates since 2001, the vast majority of Africans (and Indians) remain in the low-income category. This underscores an important fact–not being poor is not the same as being middle class. So, a laborer in India earning $10 a day–a marginally livable wage in that country–is no longer experiencing abject poverty–insofar as these categories can be objectively defined–, but is definitely not yet Middle Class.

Get ready for more disruptive change

While I’m hoping this comes to pass, I have doubts. Let me explain… For starters, the middle class in the West and the rest of the developed world is eroding. From a broader perspective, we can expect an acceleration of disruptive changes locally and globally. For the growing global middle class to feel secure, governments will need to take action to provide solutions to problems that are exceeding their current grasp.

  • Among the key global challenges the world needs to address are climate change (ranked the number one threat by the World Bank), the related growing scarcity of water, and the impact of AI (Artificial Intelligence)-based robotics on jobs. In addition, global terrorism inevitably will utilize new, more dangerous digital and military technologies that will be harder to contain. –These changes, by contrast with the overall OECD projection of middle class growth, are predicted to push more than 100 million people into extreme poverty.
  • Strongly related to digital and biotech breakthroughs is the dramatic shift in wealth to the top less than one percent of the population. While technology has made the world richer overall, most people are not benefiting. Since 2009, the world’s top less than 1 percent has grown from 44% to about 50% of the world’s wealth. By 2020, it is estimated that the percentage will rise to 54%. Global populations, fueled by rising expectations are increasingly angered by this trend.

Coming challenges

  • Middle class employment growth will be slowed by the headwind of a drastic reduction in the need for low-skilled middle class workers around the world. Many of them only recently joined the middle class and are not going to easily accept returning to a lower standard of living.
  • Oxford economists estimate that by 2036 almost 50% of U.S. jobs will be vulnerable to computer-based automation. Even white-collar professionals like lawyers, doctors and financial middlemen are threatened by the new technology that has helped websites like WebMD, LegalZoom and E*Trade thrive. That said, jobs that provide local products and in-person services, many of them low-paying jobs like nursing home aides will remain protected, at least for now.
  • Cheaper fossil fuel-based energy cuts both ways. Since Barack Obama was elected in 2008 oil prices have (recently) fallen, the price of solar energy is down by 78 percent, and the cost of wind energy down by 58 percent, thanks largely to technological advancements and improved economies of scale. While the global economy grew by 3 percent in 2014, these improvements have resulted in zero increase in global emissions. Yet, with fossil fuels more competitive than just a year ago, there is less incentive for reducing the cost of environmentally safe, cheap alternative energy sources. And without progress on that front, global climate change, according to 97% of climate scientists, will accelerate, leaving the world vulnerable to a series of catastrophic changes that will challenge the viability of civilization and life itself.
  • Finally, these and other countervailing forces will likely play out in a way that that even the best research organizations can’t predict despite new, more effective disruptive change statistical models.