The Slowdown of Emerging Giants: The Economic Challenges of the BRICS

The world economy has perceived notable global changes in the share of output in the last few decades. The increasing role of emerging market economies (EMEs) such as China and India as the engine of global growth has marked a shift in economic power away from Western European countries, The United States and Japan. For instance, The United States and the G7 economies accounted for about 51.2% of the global GDP in the 1990s compared to approximately 31.2% in 2015, meanwhile China and India increased from 7.7% to 24.3% in the same period. This unprecedented economic transformation marked a period of the most rapid emerging-market growth the world has ever seen. It was mainly driven by the denominated BRIC countries of Brazil, Russia, India and China, an acronym coined by Jim O’Neill of Goldman Sachs in 2001 due to their impressive economic growth, with South Africa being included in 2010. However, the economic prospects and the slowdown of the emerging giants project an outlook of global uncertainty and moderate global GDP growth in a moment of plummeting commodity prices and tightened financial conditions. 

 

China’s Economic Downturn and its Effect on the BRICS

 

The slowdown of the Chinese economy is one of the most important reasons of the current difficulties in the major EMEs. The impressive economic boom experienced by China in the last two decades has been struggling to maintain its double-digit growth figures. The economy has not shown signs of rebounding after reaching its maximum GDP growth rate of 14.2% in 2007, just before the financial crisis. According to China’s interpretations, its significant economic slowdown is part of a “rebalancing” towards a “new normal” economy characterized by the transition from labor-intensive exports and high investments to services and domestic consumption. Yet, the shift towards this “new normal” economy, a term used for the first time by President Xi Jinping in 2014, may turn difficult as domestic consumption rates remain low, and the level of exports and investments are vulnerable due to the tightened financial conditions.

 

China has become the center of growth of the major EMEs accounting for over 55% of the BRICS GDP. According to the OECD, its diminished imports and low demand will sharply affect Russia, Brazil and South Africa which have intensive trade and are net exporters of commodities to China. The Chinese slowdown comes at a time when Russia and Brazil are experiencing deep recessions with sizeable currency depreciations and inflationary pressures. In India, by contrast, it is expected to have a sustained growth with the potential for structural reforms that will benefit its economy.

 

The current challenges for China are marked by a contracted real estate sector that accounts for almost 15% of the GDP, an increasing debt, weak external demand and rising inequalities. The real estate sector has been essential to fuel other industries such as metals, cement and glass but it has experienced mismanagement with overbuilding and price distortions. As a result, the instability of the market has significantly reduced the demand for residential properties. The economy also experienced a rapid increase in public debt reaching 282% of GDP in 2014. It has been largely driven by local governments financing infrastructure projects and investments. Moreover, the weak global demand for Chinese goods and services will continue to hurt its economy as it happened in 2015 when trade volume decreased by 7% compared to the previous year. Even though the devaluation of the Yuan may provide a stimulus for higher exports, the plummeting of oil prices and contracted financial conditions will significantly affect its performance. 

 

Deep Recessions in Brazil and Russia

 

The Russian economy enters 2016 coming from a weak and stagnant growth over the past two years. The ruble exchange rate has reached a new record low by mid-January as the oil prices fell below US$30 per barrel. The lifting of the Iranian sanctions makes it likely for a further reduction of oil prices as OPEC countries refused to engage on supply management actions and cut production. The growing rent-based economic model that has predominated over the last decade is making the country more vulnerable to external shocks as budget revenues, GDP growth, investments and exchange rate correlate directly with commodity prices. As oil prices fell by 60% since June 2014 and commodity prices remained unstable, Russia is struggling to grow partly due to its undiversified economy. In addition, geopolitical tensions and sanctions have made the situation worse posing limitations to external access to financial markets and investments in infrastructure and technology.

 

The sanctions imposed by Russia on Western countries and Turkish exports will also affect Russian households. For instance, the World Bank forecasts that the ban on Turkish products such as fruits, chicken and vegetables is expected to increase inflation by about 0.5 percentage point in 2016. The champion program of the government to promote an import replacement may be difficult as the economy struggles to diversify. Unemployment rate rose to 5.8% in November 2015 and real wages continued to decline with a contraction of about 9%.Thus, the need to conduct a prudent fiscal policy and implementation of gradual structural reforms may revive Russia’s economy from its stable stagnation.

 

Similarly, The Brazilian economy has entered in a deep recession experiencing the worst crisis since the 1930s. According to the IMF, Latin America’s largest economy is expected to contract by about 3.5% in 2016, the same year as it is hosting the Olympic Games in Rio de Janeiro. The mismanagement of macroeconomic policies and the sharp fall of oil prices have also made the situation worse. The fiscal deficit increased from 2% of GDP in 2010 to 10% in 2015 with a debt-to-GDP ratio reaching 70%. The high inflationary pressures may push to new high double digits, with inflation currently situated in about 12%. In addition, the biggest bribery scandal in its history is under investigation due to the state-controlled oil giant Petrobras, followed by the arrest of some of the leading politicians and business leaders in Brazil. Thus, political instability, economic stagnation and a growing social discontent are making Ms. Rousseff one of the most unpopular leaders in the country’s history with an approval rate of 9% in 2015 according to Brazilian Institute of Public opinion and Statistics.

 

Social Unrest and Rising Disparities

 

The slowdown of China, Brazil, Russia and South Africa not only increase uncertainties in the global economy but also influence their fundamental role in reducing poverty as the BRICS account for almost half of the world’s poor people. For instance, Brazil reduced its extreme poverty from 16.5% in 1991 to less than 5% in 2014 and China managed to decrease it from 80% in 1979 to less than 10% by 2014. However, concerns about reverting this trend start to emerge as poverty rates start to climb. Poverty levels jumped in Russia in the last years from 11.2% in 2011 to over 15% in 2015. Thus, over three million people are expected to slide back into poverty and figures for Brazil are also concerning particularly due to its deep economic crisis. Growing income disparities and inequality remain a big challenge with large regional disparities in rural areas, limited access to credit and education for the poorest people. Thus, the slowdown of the BRICS contributes to a cloudy socioeconomic outlook for 2016 marked by both adverse external shocks and internal vulnerabilities.