The economy in 2009: out of The Twilight Zone ( 273,63 KB )

 

Brazil, Russia, India and China, the biggest emerging countries, will also suffer from global crisis

  Ever since 2001 when Jim O’Neill, an economist at Goldman Sachs, coined the acronym BRIC to designate the group of emerging countries made up of Brazil, Russia, India and China, the way of looking at the world economy and its interconnections has substantially changed. What does not seem to have changed is the key role these countries play in global growth.

  Their high growth rates in recent years and the fact that they account for 42% of world population are the main features that define the BRIC as a group. In particular, their average annual growth rate was close to 8% during the 2000-2007 period. Furthermore, they contributed to around 36% of world growth and it is expected that China’s contribution alone will be close to 40% by 2009. Finally, the BRICs as a whole have accumulated large foreign reserves (2,800 billion dollars) which means nearly 40% of world reserves.

  At the beginning of the new millennium, the vitality of these emerging countries brought up several theories prophesizing a process of decoupling between the cycle of the BRICs and that of the advanced economies. A lot has happened since then and in recent months it has become clear that the emerging countries are also going to suffer the consequences of the world financial crisis. This will happen but not to all equally. China will continue as the strongest economy among the BRICs, with growth rates of 7%-8%. India’s growth could hold above 5% while the slowdown in Brazil will be more notable with growth dropping to values around 2%. Russia, on the other hand, is likely to show negative growth (see above graph).

  In China, the growth potential of domestic demand is the main strength at a moment of weakness in foreign demand. Private consumption still represents a small part of GDP (less than 50%) and the Chinese government is taking a series of measures, both fiscal and of a more structural nature, to boost consumption. The starting point of China’s fiscal balance (a surplus in 2007) has made it possible to put forward a package of fiscal measures equivalent to 5% of GDP. The increase in spending on education, health and pensions should contribute to reducing the high savings rate of Chinese households (to a large extent of a precautionary nature). The reduction in the price of oil will also provide a breather for China’s economy, a net oil importer. For the moment, the drop in inflation, partly the result of lower fuel prices, has made it possible for the central bank to sharply lower interest rates and the reserve requirement ratio, which could contribute to growth in the upcoming year.

  Nevertheless, the slowdown in China’s exports with the drop in world demand, especially from United States and Western Europe (areas that make up 40% of all Chinese exports), involve a downward risk. November exports were down compared with the year before for the first time in more than seven years (2.2%). However, as a large proportion of inputs used by the export sector are imported (in other words, the value added of China’s exports is not very high), the negative impact of a drop in exports on GDP growth, which measures value added domestically, while it cannot be ignored is not as high as might be feared.

  India’s economy is less dependent on foreign trade than China’s (the weight of exports in GDP is much lower) and, for this reason, it will not suffer so much from the impact of a global slowdown in trade. On the other hand, the drop in oil prices means a major breather for consumers, companies and for the government which was partly subsidizing fuel prices. The world financial crisis will be felt through a drop in the investment inflows which were providing a considerable amount of liquidity to the financial system and driving the growth of credit. Nonetheless, the drop in inflation (as in China) has provided the central bank with a precious margin for manoeuvre in reducing the interest rate and the reserve requirement ratio. The reduction of the subsidy on fuel and efforts at fiscal consolidation in recent years has also created room for fiscal expansion that the authorities have taken advantage of in order to announce a fiscal stimuli plan equivalent to more than 1% of GDP.

  Brazil, and especially Russia, both major exporters of commodities, will suffer from the fall in world demand and the sharp drop in commodity prices. In the case of Russia, the drop in oil prices has a very significant impact on fiscal revenues thus, reducing the margin for carrying out expansionary fiscal policies. In both countries, the worsening of their foreign position has brought about depreciation of local currencies which is tending to push inflation up and to limit the margin for monetary policy. In fact, Russia’s central bank was forced to raise interest rates in December (100 basis points) in order to defend the rouble and halt the flight of capital whereas Brazil has not changed its interest rates. The flight of capital from Russia, as well as being a major loss of international reserves, will reduce liquidity of the financial system and considerably tighten terms for access to credit. Brazil’s more solid fiscal situation and the credibility of its central bank means that the situation is somewhat more manageable.

  In fact, the BRICs will also suffer from the world crisis, although not all to the same degree. Whereas the Asian giants will be glad of the collapse of oil prices and the strength of economic policies, Brazil and Russia will pay for their high dependence on commodity exports. For all four countries, the short-term risks have a downward bias. Over the medium term, however, the BRICs have a broad upward path ahead and, no doubt, they will again surprise us with their growth rates.

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