Disappointing economic data points out of India and China have some pundits asking whether we should start freaking out about whether the emerging markets like the BRICs ( or Brazil, Russia, India and China) will continue to drive growth in the global economy.
Jim O’Neill, the legendary economist who coined the BRICs acronym, addresses this concern extensively in his latest Viewpoints note.
“It is undoubtedly the case, with the exception of Russia, that Q1data in the BRIC economies has been disappointing,” he writes. “Growth in Brazil and India has been especially weak. Ongoing economic releases, notably another soft PMI for China published Friday, adds to the sense that things are not going as well as the optimists hoped.”
Click Here For Jim O’Neill’s Awesome Charts On The BRICs >
At this point, O’Neill isn’t ready to count out the BRICs as the engine for global growth. Here are some of the major points he makes in his longer-than-usual note.
- “Brazil disappointing”: “Brazil faces two additional challenges. One is to reduce its vulnerability to “Dutch disease”, i.e., to be less reliant on a persistent improvement in its terms of trade due to rising commodity prices and to avoid spending actual or perceived revenues from its commodity prowess on government projects…Second, Brazil needs to lose its overvalued currency or it will become more and more dependent on commodities…[T]he decline of real interest rates and the Real should be viewed positively from a medium-term perspective”
- “Russia is holding up”: “Russia was the only one of the four that positively surprised in Q1, with real GDP rising 4.9 pct year on year…the biggest threat to Russia is a sharp fall in oil prices, which I think is possible at some time. To mitigate this risk, Russia must undertake steps to diversify its economy, boost the rule of law, including corporate law, and proceed with most of its planned privatizations in a transparent way.”
- “India, the most disappointing of them all”: “It easily has the best long-term growth potential of these four countries simply due to its spectacular demographics…To unlock this potential, however, India must allow its cherished democracy to actually function and get things done…Hopefully, the sizable nature of the recent disappointments will finally force some of their key policymakers to start making some decisions. The reversal of some of the mistakes made in late 2011, particularly in regard to foreign direct investment, seems key to me.”
- “China, actually still the beacon of light”: “While it now looks as though Q2 real GDP growth will be weaker than Q1’s “disappointing” 8.1 pct, our proprietary leading indicators have turned upwards in the past couple of months. It is quite clear that Chinese financial conditions are starting to ease…The 7.5-8 pct real GDP growth, led by the consumer, that we have assumed for the decade seems set to continue. In a global context, this assumption translates into an addition of around $8 trillion in real terms to world growth, about the same as the US and Europe put together, or in the context of the Brazilian and Indian “disappointments”, about 2/3 of the BRIC total that we are forecasting.”
Indeed, the sheer size of China and the amount of global growth it alone generates is astounding.
“I have pointed out that in 2011, China’s nominal $GDP rose by 1.3 trillion, equivalent to creating an economy the size of Greece every 11½ weeks and an economy the size of Spain in not much more than a year, O’Neill writes. “The BRIC countries collectively contributed around $2.2 trillion, not too far off the equivalent of another Italy.”
He recently illustrated the power of the BRICs in a series of charts in a presentation that he gave to the U.K. Society of Business Economists.