Until recently, the Eurozone has been the sick-child of the global economy. But as growth in the EU is finally gaining pace, that “honour” seems to be shifting to new candidates: the emerging economies. Emerging economies have been strong growing and promising markets for a long time, but this sentiment is quickly changing. Disappointing growth and spreading concern have recently caused a turmoil in the emerging markets. For the first time in more than 20 years, there is a net outflow of capital from the emerging markets. An unexpected twist, particularly for the ones that seemed the most promising: the BRICS (Brazil, Russia, India, China and South Africa). This acronym (initially without South Africa) was coined in 2001 by a Goldman Sachs report that introduced the world to their profitable potential. As this article will argue, those days appear to be over.
The leader of the pack is China. Since the Goldman Sachs report, its economy has doubled twice in size and currently produces more than 16% of global GDP. However, China is facing a difficult challenge now: a slower growing economy. According to the latest data, China is growing at an annual rate of 6.9%, just below the target of 7%. For most economists, this estimate is still too optimistic and we are likely to see further declines in the future. However, this smaller growth is still quite robust and not likely to collapse in the coming years. What is more relevant, is the shift taking place within China’s economy: away from investment and towards consumption. As a result, there is a growing divergence between China’s main sectors: while service is prospering, industry and manufacturing are becoming less profitable. Coordinating this transition through structural reform is the Chinese government’s main concern now. The recent volatility in its stock market and sudden depreciation of the Yuan are considered by investors as failures of the Communist Party. These failures have casted doubts on the ability of the Party to guide China gently through its transformation.
While China still appears to be doing relatively well, Brazil is a different story. Out of all the BRICS countries, Brazil is arguably facing the most unoptimistic scenario. The Brazilian economy finds itself in a recession with GDP contracting by 3% this year. To make things worse, both its monetary and fiscal policy are tied. Persistently high inflation (close to 10%) stops the Central Bank from supporting the economy by further loosening its policy rate that currently stands at 14.25%. At the same time, interest payments on government debt require 8% of GDP and leave little room for fiscal expansion without further increasing the pile of debt. Even though Brazil’s government debt to GDP ratio is relatively low (66%), it pays a very high interest rate on this debt (about 14%).This high interest rate is mainly the result of Brazil’s long history of defaulting on its debt. The Brazilian recession is fuelled by the recent turmoil, but indirectly is the result of years of mismanagement by its politicians. The unrest in Brazil is only beginning and likely to drag on for years.
Then there’s the Russian economy, the fate of which is inextricably tied to that of oil: a quarter of GDP, half of government income and more than two thirds of export comes from the black gold. As a result, the collapse of the oil price (down 60% in a year) has greatly affected Russia’s economy. Research suggests that at a price below $60 only about a third of Russia’s oil reserves are profitable. Moreover, because of oil’s dominant share in Russian exports, the Russian rouble’s exchange rate moves largely together with the oil price. The rouble depreciated heavily in 2015 which (by making imports more expensive) drove up inflation to above 15%. Export restrictions imposed by Europe further added to inflation and have led Putin to promote a policy of “import substitution”; producing imports within Russia itself instead of importing them. The oil price and the rouble have somewhat recovered since then (mainly as the result of measures taken by the Russian Central bank), but both remain fragile and susceptible to further volatility. GDP is estimated to contract by 4% this year, as Russia enters a recession some already claim is the worst the country has experienced in two decades.
There’s also good news. For the first time in more than two decades (with the brief exception of 1999) India’s GDP is estimated to grow faster than China’s. The Indian economy has continued to do well amid the turmoil in emerging markets. There are two main reasons for this. Firstly, India is a commodity and oil importer, so a slump in prices of these goods works favourably. Secondly, it’s economy is not heavily dependent on Chinese demand for its exports (contrary to, for example, the Australian economy). However, India is far from immune to the turmoil that is shaking emerging markets. As global trade is decreasing Indian exports will inevitably decrease as well. This is one of the reasons why the Indian Central Bank decided to cut interest rates by 0.5% last September. Furthermore, many domestic issues in India stand in the way of sustainable, long-run growth. India has fared relatively well, but is far from safe. Similar to China, it is entering a crucial phase in which economic growth slows down and structural reform is required to sustain growth.
The last one, South Africa, is not an original BRIC-economy but only “joined the club” in 2010. The South African economy continued to show strong growth in the wake of the financial crisis, but the recent unrest has proven disastrous to its economy. South Africa is a large exporter of commodities, most of which are destined for other emerging markets in Asia and Africa. The fall in commodity prices and global trade has already caused GDP to contract by roughly 1% last year and is likely to hurt the economy even more in the future. Meanwhile, the unemployment rate in South Africa skyrocketed to over 25% and large state owned companies are struggling with collapsing revenues and piles of debt. The road lying ahead of South Africa is a bumpy one.
The BRICS find themselves at a crossroad. Three of their members are entering severe recessions, while the other two try to steer their slower growing economies towards a “soft landing”. All of them have been carriers of global growth in the twenty-first century. Over the past years their growth has stagnated and 2015 is looking out to be the final page of this chapter. Global trade is collapsing and money is reversing its course across oceans at a momentous pace. Meanwhile, the developed economies are far from being in the safe zone. As Andrew Haldane, chief economist at the Bank of England stated: “the emerging markets crisis might well become the third chapter of the financial crisis”.