O’Neill’s BRICs Risk Hitting Wall Threatening G-20 Growth
Even Jim O’Neill is asking whether the BRICs need reinforcing 11 years after he coined the term to describe the world’s future powerhouse economies.
O’Neill, chairman of Goldman Sachs Asset Management, says his thesis that Brazil, Russia, India and China would together increasingly buoy the global economy faces “a more challenging test” as investors dump the countries’ stocks. China pared its growth target to the lowest since 2004, Standard & Poor’s may cut India’s investment-grade credit rating, Brazil is on pace to expand less than 3 percent for a second straight year and falling oil prices may hurt Russia.
A prolonged slowdown in the four countries poses a fresh threat to a world economy suffering its weakest spell since the end of the 2009 recession, which the BRICs helped shorten by contributing about half of the international expansion since 2007. Leaders attending next week’s Group of 20 summit in Mexico are already expressing concern, with Brazilian President Dilma Rousseff warning June 4 that emerging markets can’t carry the weight of the world on their shoulders.
Rich-nation policy makers “are so wrapped up in their own problems they’re praying some of this weakness is just temporary in the BRICs,” London-based O’Neill, 55, said in a telephone interview. “If it’s not, then it’s pretty worrying.”
While O’Neill is standing by his call that China will remain robust and the BRICs will together grow 7 percent this year after 7.5 percent in 2011, economists at Morgan Stanley, Bank of America Merrill Lynch and Citigroup Inc. are scaling back their forecasts for emerging markets.
In a sign of the economic threats surrounding the BRICs, Citigroup’s surprise index, which measures how much data miss predictions, is at minus 81.10 for the group, down from 15.8 three months ago and the weakest of all its gauges.
Investors have moved out of emerging market equity funds for eight of the last 10 weeks and asset managers now have their lowest exposure to such markets since October, a survey by BofA Merrill Lynch found this week. The capital flight is driving down stock prices, with the MSCI BRIC Index (MXBRIC), which tracks the group’s biggest equities, down 25 percent from a year ago. The Indian rupee, Russian ruble and Brazilian real are the three- worst performing currencies this quater among 25 emerging-market currencies tracked by Bloomberg.
After China’s growth moderated in the past five quarters and gross domestic product rose 8.1 percent in the first three months of the year, consumer prices rose the least in two years in May and manufacturing expanded at the slowest pace in six months. The government is targeting growth of 7.5 percent this year.
India’s 5.3 percent expansion in the first quarter was the weakest in nine years and S&P warns the country may be downgraded unless growth picks up and political roadblocks to decision-making are overcome. Brazil’s 0.8 percent growth in the first quarter from the same period a year ago also undershot forecasts even after policy makers cut taxes and interest rates to revive consumer spending.
Although Russia’s economy unexpectedly accelerated in the first quarter, expanding 4.9 percent from a year earlier, the government projects growth of no more than 4 percent in the coming years as output of oil, the nation’s biggest export, stagnates. The price of oil is down about 18 percent this year.
While Europe’s crisis is sapping export demand -- Chinese shipments to the region have fallen three in the first five months of the year -- some of the brakes on growth are homespun. JPMorgan Chase & Co. cited China’s efforts to cool inflation and demand for property, as well as limited lending from Brazilian banks. Its economists now expect emerging markets growth of 4.5 percent, down from a previous estimate of 5.2 percent.
G-20 leaders start arriving in the resort of Los Cabos on June 17, the same day as parliamentary elections in Greece. With the threat of Greece exiting the euro currency union hanging over the summit, BRIC leaders who for years have been seeking a bigger say in how the global economy is run will come under pressure to detail contributions to the International Monetary Fund. The Washington-based lender said in April that it is boosting its financial firewall by $430 billion.
O’Neill, who coined the BRICs term in 2001 and was Goldman Sachs Group Inc.’s chief economist until September 2009, estimates that China last year generated the economic equivalent of Greece every 11 1/2 weeks, while the group contributed about $2.2 trillion, almost the equivalent of Italy’s GDP.
Weakness in China alone has the potential to reinforce woes elsewhere. Brazilian soy, iron ore and other commodity exports to the largest emerging economy are already on course for their worst performance in a decade.
Caterpillar Inc., (CAT) the world’s largest maker of construction and mining equipment, in April identified slowing demand and revenues in China and Brazil. WPP Plc (WPP) Chief Executive Officer Martin Sorrell said June 13 that the biggest international advertising agency is “increasingly wary” of a slowdown in traditionally high-growth economies.
Europe’s difficulties could also escalate if its countries suffer falling demand from previously strong markets, according to David Lubin, head of emerging market economics at Citigroup in London.
Greece, for example, saw an 82 percent increase in shipments to China last year, according to a March report from the Greek Embassy in Beijing. China is Germany’s fifth biggest trading partner, buying 64.8 billion euros of its goods last year.
“A country that is potentially insolvent could be tipped into actual insolvency if external demand is weak enough,” said Lubin. “If creditworthiness is partly explained by how strong a country’s export growth is likely to be, then weak Chinese data plays negatively into the market’s confidence about Europe.”
Alberto Ades, co-head of global economics research at BofA Merrill Lynch, estimates that given their combined size, a one percentage point drop in the GDP of emerging markets is the equivalent of a 1.7 point fall in the U.S. He predicts developing economies will expand 5.3 percent this year, down from a 5.5 percent estimate at the start of the year.
“When you think about emerging markets driving growth, what happens to them is pretty significant,” he said in a telephone interview.
Policy makers are responding where they can. China last week cut borrowing costs for the first time since 2008, while Brazil’s central bank has signaled it will reduce its benchmark rate for an eighth straight time in July after cutting it to a record low 8.5 percent in May.
China may also introduce additional stimulus to protect its growth target, and Indian Prime Minister Manmohan Singh on June 6 outlined initiatives including port projects worth $6.3 billion.
Officials may have less room for action than five years ago when the global financial turmoil began, according to Ades. Inflation in emerging markets, fueled by the boom years, is sticky and interest rates adjusted for prices are below their pre-crisis levels in Latin America and low in Asia, he said.
Government debt loads are also higher, with the combined emerging-market fiscal deficit at 1.6 percent of GDP last year compared with 0.2 percent in 2008, according to Ades. Debt ratios could soar if emerging market currencies that are overvalued by as much as 60 percent lose strength, said Walter Molano, head of research for BCP Securities in Greenwich, Connecticut.
“The marketing hype surrounding the BRICs has run its course,” said Molano, who regularly travels to eastern Europe, Asia and Latin America.
To be sure, emerging markets have pockets of strength with record international reserves and bigger than ever domestic capital markets. The group will expand at an average pace of 5.5 percent this year, compared with 1.4 percent for developed countries, according to IMF estimates in April. A Societe Generale SA poll of emerging market investors released this week found 47 percent bearish toward emerging markets in the near term, an improvement from 79 percent in May.
O’Neill, who recently published a book entitled “The Growth Map: Economic Opportunity in the BRICs and Beyond,” said he is more concerned by Brazil’s weak growth and India’s policy paralysis than he is by China, which he says remains on track to become a more consumer-led economy.
He remains “relatively sanguine” that his world view is intact a decade since he and colleagues at Goldman Sachs predicted that the countries would join the U.S. and Japan as the world’s biggest economies by 2050. The BRICs moved from 11 percent of global GDP in 1990 to about 25 percent in 2011 and are on course to reach 40 percent by 2050, Goldman Sachs said in a December report, which also said their potential growth rates may have probably peaked.
“The idea countries always grow at a ridiculous rate was never the case,” O’Neill said. “The fact they’ve been disappointing for one or two quarters is neither here nor there.”
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