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Consumers and growth

Nearly three-quarters (73.8 percent) of our gross domestic product (GDP) is accounted for by personal consumption expenditures. Thus, when consumer spending slows down for one reason or another, the entire economy slows down. This is unless offset by spending by the government, for services and infrastructure; by private firms for investment; or by foreigners buying our products and services via our exports, or when they come as tourists in our country.

It has long been said that our economy is propped up by the remittances sent home by overseas Filipino workers (OFWs), and that is largely true. That is because these remittances fuel a prominent part of the consumer spending in our economy. Many years ago, the administrator of the Philippine Overseas Employment Administration told me of how her agency was offered free space for its frontline services in the Mall of Asia by the Sy family, owner of the SM mall chain. It was the least they could do for our OFWs, they reportedly told her then, as they owed an estimated 70 percent of shopping mall sales to them—and that could well be true to this day.

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With its dominant and critical role in our economy, it is useful to understand the forces affecting the level and nature of consumer spending. Tracking consumption behavior and its changing patterns is key to business planning in any enterprise, because business performance ultimately hinges on how much consumers spend, and on what. On this, general price levels matter, as higher prices deter consumer spending. We saw this in the latter part of last year, when higher rates of inflation appear to have dampened consumption spending growth from 6 to 5.3 percent.

Average income levels also matter, as families’ spending patterns change with growing incomes. As one would expect, food and necessities dominate spending where average incomes are low, and it’s an observed fact that the proportion of household income spent on food falls with rising incomes (economists call it Engel’s law, for the German statistician who first documented it). Correspondingly, recreation and luxuries take a greater part of the budget as average household income rises. With an average income (GDP per capita) of $3,000 now, the Philippines has passed the so-called “motorization income level” of $2,600, at which sales of motor vehicles have been observed to rapidly accelerate elsewhere. If traffic is hardly moving on our city streets, blame it on Filipinos’ rising incomes.

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Age demographics of the population also matter. Nowadays, the peculiar spending habits of millennials and the even younger “Gen Z” is of great interest in business planning, particularly in economies with dominantly young populations such as ours. In aging economies such as in Japan, North America and Western Europe, spending patterns of the elderly are of strong interest. I wrote before of how improved public health and higher life expectancies have led to a new generation of senior citizens who are more numerous, more healthy, more educated, more wealthy and more active than ever before. They travel, renovate their houses and buy luxury cars (the average age of a Porsche buyer is reportedly 58). Businesses whose products and services cater to distinct age groups would thus do well to watch such changing demographic patterns closely.

Finally, income distribution has a bearing on aggregate consumption levels, as lower-income families have a higher propensity to consume, or spend a greater part if not all of their incomes, while richer families save a relatively greater part of theirs. Hence, one would expect less consumption spending in an economy where incomes are skewed toward the rich, than in one where incomes are more evenly spread. Based on this, economists often argue that better income distribution would be more conducive to sustained economic growth.

The top one-fifth of our population receives eight times as much income as the bottom one-fifth, making our income gap wider than in most of our comparable peers (where the same ratio commonly ranges from five to six times). We need to work on that more if we are to improve our long-term economic growth performance.

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