Are the wheels coming off the BRICS juggernaut?

July 30, 2013

     By Duncan Green     

Nouriel Roubini (aka Doctor Doom) and the Economist cover story on the same topic? It must be serious. The issue is whether the glitter is coming off the BRICS growth surge. First the Economist:

‘China will be lucky if it manages to hit its official target of 7.5% growth in 2013, a far cry from the double-digit rates that the country had come toBRICS 1 expect in the 2000s. Growth in India (around 5%), Brazil and Russia (around 2.5%) is barely half what it was at the height of the boom. Collectively, emerging markets may (just) match last year’s pace of 5%. That sounds fast compared with the sluggish rich world, but it is the slowest emerging-economy expansion in a decade, barring 2009 when the rich world slumped.

This marks the end of the dramatic first phase of the emerging-market era, which saw such economies jump from 38% of world output to 50% (measured at purchasing-power parity, or PPP) over the past decade.’

However, don’t despair, because ‘a broad emerging-market bust looks unlikely. China is in the midst of a precarious shift from investment-led growth to a more balanced, consumption-based model’ but has enough cash in the piggy bank to get it through any wobbly patches. What’s more ‘most emerging economies have better defences than ever before, with flexible exchange rates, large stashes of foreign-exchange reserves and relatively less debt (much of it in domestic currency).’

But China is definitely running out of puff – an ageing population, less of a technological gulf with the advanced economies (absorbing existing technology is a lot easier than developing new stuff, and so generates very high growth rates).

China’s slowdown has knock-on effects by ending the commodity boom for energy (Russia), metals and grain (Brazil). But the Economist seems at a bit of a loss to explain India’s slowdown.

And from the Economist’s accompanying longer briefing:

‘This year will be the first in which emerging markets account for more than half of world GDP on the basis of purchasing power. In 1990 they accounted for less than a third of a much smaller total.’

Roubini adds a few other elements:

Most emerging-market economies were overheating in 2010-2011, with growth above potential and inflation rising. They needed to slow down.

BRICS2The idea that emerging-market economies could fully decouple from economic weakness in advanced economies was far-fetched. Contagion from Europe and the US, if only weak, has got to them.

‘Most BRICS and a few other emerging markets have moved toward a variant of state capitalism. This implies a slowdown in reforms’. Not sure I buy this – the move to state capitalism kept them out of the clutch of the financial crisis and kept them growing at hyperspeed and now – voila – the very same thing explains their slowdown.

He also makes a pretty unconvincing link to US policy on quantitative easing (not that I am in any position to judge – I barely know what it means).

And prize for best quote goes to the Economist:

‘A rising tide may lift all boats; a falling one reveals who has no bathing trunks on.’

Wish I’d thought of that.

July 30, 2013
Duncan Green