Is the Show Over for the BRIC Economies?

Investing Advice

They don’t call it a global economic slowdown for nothing: Evidence is mounting that the BRICs –the  world’s big, fast-growing developing economies — are slowing down. Growth in Brazil, Russia, India, and China is expected to slow considerably in 2012, dampening an already weak global economy.

Since the 2008 financial crisis, it’s been powerhouses like China that have helped keep the global economy from total collapse. But if the BRIC economies sputter, what will help sustain the world’s growth engine?

What does BRIC Mean?

The term “BRIC” was first coined about a decade ago by Goldman Sachs, as a way to describe the large, emerging economies which were believed to represent the economic wave of the future. These rapidly growing economies would lift millions out of poverty and provide new markets and growth for developed-world businesses.

For several years, that premise has been mostly right – countries like China and Brazil have grown rapidly, seeing their middle class expand and providing American businesses and investors with greater returns. And they’ve weathered the global financial crisis much better than the US or Europe, continuing to post impressive growth and maintaining budget deficits lower than the developed world’s.

American investors have the BRICs to thank for the relatively buoyant stock market performance of the past year or two, as American businesses’ overseas profits have translated into higher corporate earnings and stock prices at home.

The Future of BRIC Economies

But all that may be coming to an end, suggest some analysts. Not only is growth slowing markedly in some of these economies, but increasing inflation in places like Brazil and India, for example, means that their central banks have a lower margin for reducing interest rates and boosting growth. That means it’s unlikely the large stimulus programs enacted in some BRICs during the 2008 crisis are likely to be repeated soon.

And with the developed world still struggling, these countries may, indeed, need such a stimulus for continued growth. After all, if American and European pocketbooks are still in a fragile state, who will buy all of the products produced in China or Russian commodities?

There’s another, darker view on the BRICs, too, that goes beyond thinking this is a mere slowdown. One line of thought suggests that the rapid growth these countries have experienced in the past 15 years was a one-time phenomenon unlikely to repeat itself. China, for example, benefitted largely from its low wages to lure production facilities and create an export-oriented economy. But wages are now rising in China, and production is moving to even lower-wage countries (and in some cases, even back to the US).

In Brazil and Russia, corruption and commodity dependency continues to plague many sectors of the economy and may stunt growth; already, Brazil’s Q1 2012 GDP growth rate was a mere 0.8%. China’s GDP, which had been growing at or above 10%, is projected to increase only 7.5% this year.

The Bottom Line

Sure, a 7.5% growth rate is still great by US standards, but for a country like China, it may be insufficient to keep reducing poverty at a rapid clip or encourage a transition from an export to a consumption-based economy. And if fears of a housing bubble popping come true, China will need to clean up its own economy, let alone help boost the ailing West.

In such a world, “BRIC” may just be another one of those fashionable terms from a more optimistic era. Just like “globalization” and “Internet”, it may no longer hold the promise of a brighter economic tomorrow.

“Is the Show Over for the BRIC Economies?” was written by Janet Al-Saad, MintLife Managing Editor. 






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