When Jim O’Neill christened Brazil, Russia, India, and China the ‘BRICs’ in 2001, the composition of the global economy was in the process of shifting away from the West to the new guard. But now these economies are stumbling.
The BRICs quickly exited the downturn in 2008 and 2009, assisted by the price strength in commodities and an influx of yield seeking dollars. Much of this was (and is) driven by the Federal Reserve’s Quantitative Easing program, which kept interest rates at historically low levels. But now the Fed (though coy) appears poised to begin reducing the size of its monthly purchases, and, as capital rushes to the exits, the BRICs economies are not looking too robust. In fact, most were beginning to see their growth slow before, not after, U.S. interest rates began to rise. Just as in the United States, their central banks are fighting to stimulate growth and spur job creation.
The natural-resource endowments of Brazil and Russia boost their economic growth paths and their current-account balances. But countries cannot rely on commodity abundance and historically high prices forever. The irony is that countries blessed with large quantities of natural resources tend to develop less and grow at slower rates than those without a “resource curse”. Resource-rich developing and middle income countries must grapple with the difficulty of spurring the next decade of growth.
For Brazil, the spending required to build the infrastructure necessary to host the world’s two premier sporting events, the Olympics and World Cup (estimated at $13.3 billion and $18 billion respectively), is boosting GDP and likely skewing the near-term condition of the underlying economy to the plus side. Second-quarter GDP growth reaccelerated to 3.3 percent from a year earlier, but is unlikely to continue at such a robust pace. While the unemployment rate is near a record low at 5.3 percent, it has stopped improving. Inflation, for its part, is running at just under 6 percent, well above the Central Bank of Brazil’s 4.5 percent target rate. The economy has slowed despite the large and persistent infrastructure spending, as it has been, albeit gradually, since 2010.
Russia’s GDP is poised to expand by less than 2 percent in 2013, and the government expects the economy to remain sluggish over the next several years. The decline is simply the continuation of a slow deceleration in GDP that started in 2010. Inflation has remained at or above the Bank of Russia’s target range for a more than a year, limiting the available policy responses. Luckily, unemployment is hovering at a post-Soviet low of 5.2 percent. The Russian government receives about 50 percent of its revenues from oil and gas. Commodity abundance is the reason President Putin could make the announcement of $13.6 billion expenditure from the $87 billion dollar National Welfare Fund to fund infrastructure improvements. Meanwhile, the Sochi Olympics are also providing a boost to infrastructure spending with the total cost estimated at $51 billion. The two combine for sizeable injection to the economy.
To be competitive in the twenty-first century, both Brazil and Russia will be forced to make decisions concerning their commodity windfalls and the long-term needs of their economy. Meanwhile, India and China are struggling to pivot their economies toward more sustainable internal growth compositions.
India’s dependence on foreign investment risks sparking a currency crisis. Its GDP growth has slowed to 3.2 percent, a decade low, and the official government projection for growth during the 2013/2014 fiscal year was lowered from 6.4 to 5.3 percent (this revision came during only the first quarter of the fiscal year). The country does not collect unemployment statistics, but the speculation is that unemployment is low, but under-employment is high. It’s not all bad news however. India’s infrastructure is deficient, and, with a relatively low debt to GDP ratio, it could easily finance these investments. The introduction of an “India Infrastructure Fund II” in September to generate activity and interest in private-public partnerships is a step in the correct direction. A more competent regulatory environment is also pivotal.
China is transitioning towards a more balanced economy, shifting from an export-driven to an internal consumption model. Even if this transition is successful, though, the long-term sustainable growth rate is below historical levels. An aging population and a shrinking working age population are headwinds to building a consumer economy. The one child policy may be thrown out, but this is unlikely to be a panacea. Continued moderation from a more than 9 percent annual growth is inevitable.
With the exception of China, GDP growth in the bloc is fairly mundane. And this might continue. The BRICs must be conscious of the middle-income trap, especially where wages are rising, cost competitiveness is beginning to decline, and advanced industry and technology have yet to take root. The next crisis is unlikely to come from the BRICs, but they are also unlikely to be the growth drivers they once were.
In light of the slowdown in the BRICs, the United States does not look like such a laggard. The Fed is projecting that unemployment will continue to fall, that inflation will remain contained, and that GDP growth will accelerate through 2013 and 2014. The International Monetary Fund even predicts the United States will grow nearly as quickly as Brazil, Mexico, and Russia. With a growth spurt, the United States could find itself growing more quickly than many of the heralded economies.
There is also the potential for the EU to surprise after moving through it austerity phase. Unemployment is at all time highs, but recent output data has begun to turn higher. The EU accounts for roughly 20 percent of world GDP, and is China’s largest trading partner (though the United States should displace the EU later this year). A recovery in the EU would translate directly to a better outlook in China. Brazil, India and Russia are top-ten trading partners and would benefit as well. After all, the BRICs are sitting at or near historically low unemployment rates, and the path to further employment gains is far from clear. With such low unemployment, the BRICs must make advances in labor productivity to continue their growth trajectories.
The EU, U.S. and BRIC economies are tightly intertwined. The West has been a persistent drag on the global economy to returning to growth. But now the West is rebounding, and its economic importance is waxing, not waning. The next leg of growth the BRICs are searching for may be on the way. And it may come from the West.
Samuel Rines is an economist with Chilton Capital Management in Houston, TX.
Image: Agencia Brasil/Roberto Stuckert Filho/PR. CC BY 3.0.