×

China and India can rely on young spenders to help Asia survive if a trade war erupts, Deloitte says

Getty Images

Global consulting firm Deloitte has some soothing news for those worried about the economic fallout in Asia from possible trade war- young spenders in India and China will continue to fuel growth in the region.

These consumers are "inherently optimistic and incredibly open to innovation...enthusiastic importers as well as formidably competitive exporters," according to a Deloitte January report titled "Voice of Asia."

President-elect Donald Trump has repeatedly singled out China as a target for tough talks on trade, saying the Middle Kingdom artificially weakens its currency for export advantages and is not as open as it should be to U.S. goods. China, the second largest holder of U.S. debt, has fired back that its trade policies follow global rules. In the case of India, the country manufactures a large share of generic drugs that reach U.S. shores, another target for Trump as he seeks on-shoring of jobs linked to products sold widely in the U.S.

In both countries however, spending pattern changes are seeing a sharp switch from frugality by many households to wider use of credit and lifestyle purchase linked to rising incomes, a Deloitte report said.

"We are seeing a transition of the growing middle class in very large economies such as China and India, where consumers are coming to the fore," Ric Simes, economist at Deloitte and one of the authors of the report, told CNBC.

In China, where economic growth has slowed to its lowest pace in over 26 years, policymakers recognize that investment spending led by state-owned enterprises is not sustainable, so consumer spending has to take over as the main growth driver, according to the report.

And in India, consumption continues to be driven by a young, tech-savvy and aspirational demographic and household spending that accounted for 59.6 percent of gross domestic product in 2015, higher yet than that of China's, which stood at 37 percent, according to World Bank data.

"The consumption growth story is not uniform and not without risks, but it is part of a transition where the structure of the economy is evolving," Simes said.

Young people are the drivers of greater interest in spending over saving in both cases, according to the Deloitte report.

While the older Chinese are more frugal due to the lack of a social safety net, the young are optimistic about their future incomes and have "happily embraced credit, consumption, and debt," the report stated.

A big risk, however, is the overheating property market which has underpinned most of China's consumer spending.

"Banks, wary of lending to an industrial sector plagued with overcapacity, have regarded the housing sector a safer bet," said Deloitte, adding that the housing prices in the 100 biggest cities have appreciated 17 percent, and have jumped 27 percent in first-tier cities.

In India, a currency swap at the end of 2016 dimmed the immediate growth outlook as it forced the largely cash society to exchange old notes for new and limited withdrawals from early November to the end of the year.

But the start of a goods and services tax reform expected this year should see an "increase consumption demand, as lower taxation would benefit producers who in turn - driven by competition - are likely to pass on some of the gains to consumers," Deloitte said.

Follow CNBC International on Twitter and Facebook.