Millions Are Tumbling Out of the Global Middle Class in Historic Setback

One of the most economically significant trends of the past few decades has been the emergence of a global middle class. The expectation that this cohort of consumers would continue to grow relentlessly, as rising incomes in developing countries lifted millions out of poverty each year, has been a central assumption in multinationals’ business plans and the portfolio strategies of professional investors.

You can now add that to the list of economic truths that have been upended by this pandemic. For the first time since the 1990s, the global ­middle class shrank last year, according to a recent Pew Research Center estimate. About 150 million people—a number equal to the populations of the U.K. and Germany combined—tumbled down the socioeconomic ladder in 2020, with South Asia and sub-Saharan Africa seeing the biggest declines.

The Developing World’s Shrinking Middle

Defining the parameters of this global middle class has long been a contentious exercise. Pew, which has been researching the topic for more than a decade, labels as middle income those making from $10.01 to $20 a day, using data that smooth out differences in purchasing power across countries. In Pew’s analysis, there’s a separate ­upper-middle-income band made up of those earning $20.01 to $50 a day. (Note that $50 per day falls shy of what a minimum wage worker in the U.S. takes home pretax for an eight-hour day.) Others, such as the Brookings Institution, have opted for a more expansive $10 to $100 a day definition.

Taken together, Pew’s middle-income and upper-middle-income brackets encompass roughly 2.5 billion people—or a third of the world’s population. Buried inside these big numbers are many personal stories. Here we bring you four, from India, Brazil, South Africa, and Thailand. They’re tales of hard-won successes that evaporated overnight, along with well-paying jobs. Of once-­accessible luxuries, like steak for dinner or home internet access, now out of reach. Of dreams deferred, whether an automobile or an apartment.

Strivers face a far more uncertain future than in years past. China, which by Pew’s definition is home to one-third of the world’s middle class, appears to be recovering quickly, but many other developing countries face diminished economic prospects.

In its latest World Economic Outlook, released in full on April 6, the International Monetary Fund predicts the global economy in 2024 will be 3% smaller than it would have been without the pandemic, largely because developing world governments have less room to spend their way to recovery, as the U.S. and Europe are doing.

Global GDP Shortfall

Forecasts point to a struggle for emerging economies to get back to pre-pandemic path

The divergences are stark. India will end 2021 with a gross domestic product that’s 5.2% smaller than it would have been otherwise, according to forecasts by Bloomberg Economics. Indonesia’s output will be 9.2% smaller than its pre-crisis trend foretold. The U.S.? Just 1.6% smaller.

Carmen Reinhart, the World Bank’s chief economist, worries we’re just starting to get our heads around the second-order economic effects of the pandemic and that a rebound in growth rates is being mistaken for a lasting recovery.

Immunizations are proceeding far more slowly in poorer countries that have yet to gain the same access to vaccines as the rich world has. But it goes further than that. In many emerging economies, Reinhart says, banks are wondering whether a surge in lending to consumers and small businesses in years before the pandemic will come back to bite them. She’s worried that lenders will curtail credit, which could delay the economic healing.

Reinhart is also concerned that in some countries governments may be forced to switch into austerity mode prematurely because they can’t shoulder their expanded debt loads. And while inflation is muted in the U.S. and Europe, in places such as Brazil food prices are soaring, which is leading central banks to tighten monetary policy prematurely. The global economy is “bifurcating,” she says. “This has been a very long year, and I think the damage has been underestimated.”

A Dream of Car Ownership Postponed

Ravi Kant Sharma spent more than a decade saving up to buy a $6,000 Maruti Suzuki Alto, the first car many Indians purchase when they make the leap from motorcycles to four-wheelers. He started 2020 with enough for a down payment and a plan to celebrate his upcoming wedding anniversary with the purchase. The pandemic changed all that.

When the Indian economy froze, Sharma, 37, lost his job as an automotive engineer. He managed to find a new one but in another city and at lower pay. The move ate into his savings and put his dream of car ownership on hold. His family of four will be relying on their old motorcycle for some time to come. “I have exhausted all my savings. We are finding it difficult to pay installments of existing loans,” Sharma says from his new home in Bahadurgarh near New Delhi.

Sharma is part of an Indian middle class that, by some estimates, makes up one-third of the country’s 1.3 billion population. Its growth has lured multinationals making everything from cars to mobile phones, as well as giants in retail and e-commerce, to set up operations in the country. So a hit to middle-class incomes has consequences for the global economy.

The pandemic has exposed what political scientist Leela Fernandes calls “the socioeconomic fragility” of India’s middle class, which she likens to “a stock market bubble waiting to burst.”

As in other countries, India’s poorest have borne the largest share of the economic pain from the coronavirus crisis, Fernandes says. But the downturn has also wiped out scores of white-collar jobs such as engineers and teachers. About 21 million salaried workers lost their jobs between April and August of last year, according to the Centre for Monitoring the Indian Economy.

The upshot is that India’s middle class shrank by 32 million people in 2020, accounting for 60% of the worldwide drop in the number of people earning $10-$20 a day, according to Pew Research Center estimates. The reversal looks like the largest India has seen since it began liberalizing its economy in 1991.

The ripple effects have been particularly visible in India’s automobile sector, which is the world’s fourth-largest and accounts for half of the country’s entire manufacturing output. It saw a fall in vehicle sales of more than 18% in the 12 months through February.

Sharma grew up in the central Indian state of Madhya Pradesh and is the third generation in his family to attend university. He’s worked hard to shield his two school-age daughters and wife from the economic impact of the pandemic. Still, it’s hard to ignore how much his well-laid plans have been disrupted.

From Beef to Eggs

Kidney, tongue, liver. Francinete Alves doesn’t love organ meat, but that’s what she’s mulling bringing home from the discount butcher shop in a suburb of Brasilia. At least dinner won’t be another omelet.

For Alves and her 24-year-old daughter, Meatless Mondays have become Meatless Tuesdays, too. Brazil, the country renowned globally for its churrascaria steaks, is battling a vicious Covid-19 outbreak that shows no sign of peaking, and its economic consequences are visible in the diet of middle-class Brazilians.

Data from Conab, the national agricultural agency, shows that residents of the world’s No. 1 exporter of beef are eating less of it. Per capita, beef consumption fell 5%, to 29.3 kilograms (64.6 pounds) in 2020, its lowest level since 1996. At the same time, consumption of eggs rose 3.8%, hitting a new high, according to official data.

As Beef Prices Rise, Brazilians Consume More Chicken, Eggs

Alves, 58, is lucky in that she’s still employed as an office assistant. Her monthly salary of 5,000 reais ($881) is too high to qualify her for emergency cash transfers the government introduced at the start of the pandemic. But her paycheck doesn’t go as far as it used to, because food prices have soared on a combination of rising commodity prices and a weaker currency.

Ironically, the government’s largesse has played a role in raising prices, since in boosting the incomes of some 67 million poor Brazilians, it’s also boosted demand for basic staples.

In what has become a pandemic ritual, Alves scours the sales circulars and butchers’ social media posts for discounts before she goes grocery shopping, trying to find a way to justify buying the steak she’s come to miss so badly. It’s not just beef. At the outdoor vegetable market where she tries to stretch the 30 reais in her pocket, the price of everything from apples to tomatoes has skyrocketed. “In the past, 20 reais was enough for you to leave here with a lot of things,” she says as her eyes wander over corn she can’t afford.

Despite her own tribulations, Alves can still spare a thought for those less fortunate.