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Sugar Economics: How Sweet It Isn't

Globally, diabetes and obesity, or "diabesity," have hit epidemic proportions, and sugar is among the prime suspects, with calculable health and economic costs.

The global economy has a sweet tooth, and it may stunt growth.

Globally, sugar intake per capita has increased nearly fivefold over the past century, with recent gains driven by emerging markets. At the same time, diabetes and obesity—sometimes referred to as "diabesity"—are at epidemic proportions, and sugar is among the prime suspects.

Global sugar and sweeteners consumption has nearly trebled since the 1960s.

Non-centrifugal sugar is a residual product obtained by evaporating the water in the sugar cane juice; it is known by many names in different parts of the world such as panela, jaggery, muscovado.
Source: FAO, Morgan Stanley Research
*MMT: Million Metric Tons

In a recent report, “The Bitter Aftertaste of Sugar" (Mar 18, 2015), Morgan Stanley Research examines this unhealthy trend and the challenges it poses to policy makers, health-care experts, corporations, as well as investors trying to weigh the long-term impact on economic growth and industries.

Higher Health Costs, Lower Productivity

Diabesity does damage in two ways: raising health-related spending, while lowering worker productivity due to illness. Not all types of diabetes are directly linked to diet, weight and lifestyles, but the most common one, Type 2, largely is. Diabetes, obesity and their complications result in long-term care costs, often including hospitalization, a doubling down on high-cost medical care and lost work hours. Governments, employers and patients end up sharing the burden.

Regional shares of diabetes-related health expenditures, 2014

Source: IDF, Morgan Stanley Research

Lost productivity resulting from diabesity has a calculable drag on economic growth, says Elga Bartsch, Morgan Stanley's Global Co-Head of Economics. In the base case, which assumes no change from current levels of sugar consumption but different productivity levels for obese and diabetic individuals, in the Organization for Economic Co-operation and Development (OECD) area, diabesity could shave average annual real GDP growth to 1.8% over the next 20 years, significantly lower than the 2.3% that the OECD projects, Bartsch estimates.

In the high sugar consumption scenario, the annual real GDP growth rate would drop to 1.3%.

Emerging Market Risks

The OECD countries most at risk for output losses are Chile, the Czech Republic, Mexico, the US, Australia and New Zealand. “These countries all suffer from double-digit diabetes prevalence and have among the highest rates of obesity globally," says Morgan Stanley European Economist Carmen Nuzzo. At today's consumption levels, for example, Chile's cumulative loss of real GDP would exceed 30%.

Estimated economic output loss due to ‘diabesity’ by 2035

Percentage points. Cumulative losses.
Source: Morgan Stanley Research estimates

For emerging markets, such as Brazil, China, India, Indonesia, Russia and South Africa, Morgan Stanley estimates a base case 4.2% and a high-sugar scenario of 3.9% annual real GDP growth, compared with the OECD's 4.5% projected growth rate.

“Investors probably have not focused enough on the fact that 'diabesity' is increasing at an alarming rate in developing nations," Nuzzo says, noting that more than 40% of the world's diabetes cases are in China and India.

It's Everywhere

Throughout most of human history, refined sugar was considered a luxury. Today, its variations are everywhere. It's in almost all processed foods, often added to "nonfat" products to enhance flavor. It coats drug pills and infuses the syrup of children's medicine. High concentrations of both added and naturally occurring sugar are found in fruit juice, the bread we eat, and the wine we drink.

Even health-conscious consumers may not realize how much sugar they ingest on a daily basis. In a 2014 survey of residents in Australia, Brazil and Germany, Morgan Stanley found that just 6% to 8% of respondents correctly identified food with the highest sugar content.

Of particular concern is the escalation of diabesity among children and adolescents; the earlier the onset of these conditions, the higher the long-term costs. The World Health Organization estimates that obesity accounts for 2% to 7% of global health-care costs, and these numbers are likely conservative.

Sweet Optimism

There's some cause for optimism. Sugar consumption in some developed nations, for example, has declined recently, most likely the result of increased awareness of sugar's bitter effects. The public sector also has taken note and some jurisdictions have imposed, or are considering, a sugar tax to raise consumer awareness and action.

Meanwhile, the private sector is shrinking serving sizes and reducing sugar as an ingredient or turning to alternatives. The pharmaceutical industry is also ramping drug and treatment options for diabetes and obesity, with potentially groundbreaking innovations to come.

If the diabesity trend starts to slow, stop—even reverse, the effects could be startling. Imagine healthier communities; more productive working populations; less financial drag on individual, corporate and government budgets; stronger economic growth at a global scale.

That would be truly sweet.

Explore more Ideas and Research, or contact your Morgan Stanley representative for the full report, "The Bitter Aftertaste of Sugar (Mar 18, 2015). Find a Financial Advisor to discuss your investment goals and strategy.

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