Fourteen years ago, Goldman Sachs presented a thesis that quickly gained traction among investors and policy makers: Brazil, Russia, India and China, the bank claimed, would increasingly drive global growth, filling a void left by the West. Today, the opposite case seems far more plausible. The so-called BRIC nations are now threatening to drag down the rest of the world.
China’s exports declined in May for the third straight month, while imports slumped for the seventh month in a row. Asia's biggest economy, in other words, is being hit in two directions: weak demand abroad and a sluggish economy at home. Not to mention the epic stock bubble that is sucking oxygen from its financial system.
It's not just China, though, as Gabriel Stein of Oxford Economics recently explained to me in Tokyo. A new report from Oxford's research team points out that imports are currently declining in Brazil, India and especially Russia. The BRICs are responsible for a drop in annual world trade by about 1.3 percentage points, the most pronounced deceleration since the 2008-2009 global financial crisis.
And these trends extend far beyond the four emerging giants. For the 13 non-BRIC developing economies that Oxford tracks, imports of goods grew by only about 1.5 percent in the first quarter year-over-year (the long-term average for these countries has been about 8 percent). And what's most worrying is that this slowdown is taking place even before the Federal Reserve begins its announced interest rate hikes. (Emerging-market stocks fell for an 11th straight day yesterday, the longest such streak in 24 years, amid concerns about Fed policy.)
Emerging nations have certainly hit a wall before, including Southeast Asia in 1997, Russia a year later and Argentina more times than we can count. But there are good reasons to believe today's threat could be far more severe and lasting, including emerging markets' higher debt levels and relatively modest growth in advanced economies. Even with the recent pickup in job creation, today's 2.7 percent U.S. growth is about half the pace of the late 1990s, while the euro zone's 1 percent pace is only a third of its output back then. And while Japan's economy expanded 3.9 percent in the first quarter, the 30 percent devaluation of the yen is dampening growth prospects across Asia.
The stakes are also higher now than ever before, because emerging economies are more central to the global economy. In 1999, they accounted for roughly 23 percent of world gross domestic product and 38 percent on a purchasing-power-parity basis. Today, those shares are 35 percent and over 50 percent, respectively. The BRICs alone account for about 20 percent of world GDP, not much different than America's 24 percent in 2007, just before the global crisis. Meanwhile, developed nations are more financially exposed to emerging markets than ever before. In December, the Bank for International Settlements said emerging markets have accumulated debts in U.S. currency totaling almost $6 trillion.
And China is a unique wildcard in global markets. Even for the world's second-biggest economy, China punches above its weight. Its slowdown has already caused a drop in global commodity prices; advanced economies (Australia) and developing ones (Brazil and Russia) have been suffering as a result.
China's huge stock rally is another reason for worry. "It still boils down to a giant casino," Stein said. "I'm still very pessimistic." But investors still want to ride China's stock market boom while they can. Yesterday, they pushed the Shanghai Composite Index to its highest close since January 2008 (it's now up 153 percent in 12 months), despite bad news on Chinese trade yesterday. Shanghai's rally may have a ways to go before its inevitable correction.
Of course, the bigger the bubble, the greater the fallout. And as the analysts at Oxford remind us, the fallout won't just be limited to China. The dream of the BRICs increasingly seems like it might turn out to be a nightmare.
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