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Car Index Indicates Growth Potential High in Developing Nations

Despite forecasts for a slowdown in the global economy, a little known economic indicator¹ is starting to gain traction². The so called "car index" is an attempt to measure the world's middle class based on the number of people who own cars.

Uri Dadush is head of the global economics program at the Carnegie Endowment for International Peace. "Ownership of cars is going to explode, is exploding at the moment in the developing world, a sign that the middle class is exploding. And the reason for that is, is there are about 70 countries with a population of about three billion people who are approaching a threshold of income, about $4000 per capita where the middle class really increases very, very rapidly," he said.

Dadush says the relative rise in average incomes means greater demand for non-essential goods. "Because that's the threshold of income where people begin to have enough to buy all sorts of things. And it so happens that the things they will buy are the sorts of things that Japan, Germany and the United States excel at producing," he said.

But the IMF says the economic downturn which began in 2008 has also led to reduced consumer spending in developed nations. Managing Director Christine Lagarde says uncertainty³ over the debt crisis in Europe and the possibility that expiring tax cuts and massive government spending reductions could send the U.S. economy into a tailspin - remain the biggest risks to the global economy.

"We clearly still foresee a gradual recovery, but the global growth that we have forecasted 12 months ago, that we have revisited six months ago, is likely to be yet a little bit weaker than we had anticipated," she said.

Add to that, rising food prices and increased volatility⁴ in the Middle East - and Lagarde says economic growth next year is likely to be slower than the group's earlier forecast of 3.9 percent. "Small decimal points for sure, but what is characteristic is that our forecast has trended downward," said Lagarde.

Although slower growth in China and the challenges in Europe and the U.S. remain problematic, Dadush believes the prospects⁵ for global growth may be better than the IMF forecasts would suggest. "Notwithstanding the fact that they're going through a slowdown at the moment, the underlying⁶ drivers of growth in developing countries are extraordinary," said Dadush. 

Recent surveys show consumer spending in developing countries has increased three times faster than in advanced economies, with car ownership rising at a sharply higher rate than in developed nations.