SINGAPORE – For the first time in more than three decades Japan's economy, the world's second largest, is set to be surpassed in size by the rest of Asia.
That milestone, says Lehman Brothers economist Robert Subbaraman, signals the arrival of the Asian consumer as a key growth driver and probably marks the turning point for Asia's export-led economic model.
While only a small number of Asia's more than 3 billion people are moving up to middle-class income levels, analysts say the numbers are growing faster than any other region worldwide, fuelling a consumption boom.
"A sea change is happening in terms of growth of the middle class in Asia," said Yuwa Hedrick-Wong, economic adviser to Mastercard International which tracks consumer trends in Asia.
"More and more people are shifting from consumption for basic necessities to discretionary consumption — like taking a holiday abroad, going out to restaurants, visiting malls."
Hedrick-Wong describes the Asian middle class as those who earn more than $5,000 per year. As many as 80 million people in China, 15 million in Thailand, 12 million each in India and Indonesia, 9 million in Malaysia and 6 million in the Philippines make the grade by that measure.
Another 200 million or so in India now have annual income above $1,500 and they are buying shampoos, toothpaste, bicycles and other basic consumer goods.
In China, an economic census found the country had under-reported its booming services industries and GDP was 16.8 percent larger than previous estimates in 2004 — setting China on course to become the world's fourth-largest economy in 2005.
Lehman Brothers calculated the rest of Asia including India will exceed Japan's nominal gross domestic product, converted into dollars, in 2005. According to Reuters calculations based on International Monetary Fund data, this has not happened since the late 1960s.
Goldman Sachs says the implications of this will be felt as soon as next year, saying in a report that even if the U.S. economy slows, Asian consumers are likely to pick up the slack and help Asia, excluding Japan, grow 7.5 percent in 2006, compared with 4.1 percent worldwide.
The Asian consumption upturn could still hit a roadblock if oil prices stay around current levels or if birdflu escalates into a pandemic. But for now, signs abound that the traditionally high-saving Asian consumers have loosened their purse strings.
"Consumption to GDP ratios are generally low in emerging Asia — the flip side of high gross domestic saving rates," Subbaraman said.
"As countries develop they should become less heavy investment-based and more consumption-based."
The "tiger" economies of South Korea, Taiwan, Singapore and Hong Kong relied on exports to become some of the world's richest nations, emulating Japan's success story following World War Two.
The 210 million people in those five economies now form the core of Asia's middle class.
South Korea's finance ministry has forecast growth in private consumption of 4.5 percent in 2006, after it rebounded by 3.1 percent in 2005 from a 0.5 percent contraction in 2004.
"For North Asia, Korea is the prime candidate to see consumption-led demand in 2006, given the turnaround of domestic spending," said ABN AMRO Bank economist Irene Cheung.
"China is another one, in line with the government's policy to rebalance the growth driver of the economy from investment and exports to consumption."
And Asia's emerging middle class is increasingly prepared to pare savings and take on debt to buy what used to be luxuries — cars, televisions, refrigerators and washing machines.
Lehman Brothers estimates the share of household credit out of total loans outstanding in South East and North Asia, excluding Japan, has risen to 27 percent from 18 percent in 1999.
Consumers are not just spending at home. Almost 29 million Chinese travelled overseas in 2004 creating new jobs and fuelling local economies. China, Asia's largest source of tourists, expects that number to grow to 50 million by 2010.
Meanwhile, Asian central banks are taking a pro-consumption stance despite inflationary pressures.
Goldman Sachs said they were unlikely to raise rates in 2006 anywhere as aggressively as the U.S. Federal Reserve because they will allow stronger currencies to curb imported inflation.
"We think the case is building for Asia to become a more independent source of growth for the global economy," Goldman economists Sun-Bae Kim and Adam Le Mesurier said in a note.