BEIJING: Household spending is expected to almost triple in China over the next two decades, but trends like urbanisation and an ageing population will require a major response from brands, McKinsey has argued.

The consultancy polled 1,300 executives and drew on in-house data to assess the country's medium-to-long term prospects. In the first instance, it predicted GDP would increase from $6tr in 2012 to $11tr in 2020.

Looking further ahead, the firm forecast private consumption would post a compound annual growth rate of 8% from 2012 to 2030, as its share of economic activity rises from 29% to 54%.

Government consumption is pegged to improve by 62% annually in the same timeframe. Investment is also due to expand by 5.5% a year, with its share of economic output falling from 49% to 35%.

As such, while income as a share of GDP is rather low in China, at 57% versus 63% in Russia, this should change. More specifically, average urban household spending will improve from RMB39,000 in 2012 to RMB112,000 in 2030.

This constitutes a strengthening of existing trends, as 37% of household spending went to food in 2005, a total now standing at 27%. In this period, discretionary spending has grown from 30% to 35%, aiding sectors from coffee houses to cosmetics and travel.

Although rural outlay is expected to rise, China's cities will fuel this boom, as the urbanisation rate hits 70% in two decades time, when the middle class will make up 87% of urban homes, up from 71% today.

Currently, 83% of households in the "megacities" of Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen and Tianjin – each housing more than 10m residents – are middle class, compared with a norm of 66%.

One result will be a shift towards the "service-driven economy". In 2015, services are anticipated to draw level with industry to take a 42% share of economic activity; by 2030, services will boast a 53% share.

Going forward, the dozens of cities containing 1.5m to 5m people will be likely to drive this process, forming "ten-plus economic clusters, each the size of a middling European country", McKinsey predicted.

The ageing population is another key trend, as the number of people aged over 65 years old almost doubles by 2030, while the share under 15 will fall.

"As China's consumers change, so must the dynamic between people and products, and between the domestic and global market," McKinsey' concluded. "It means seeing China as a launching pad for new brands, either for other Asian and developing economies or even globally."

Data sourced from McKinsey; additional content by Warc staff