The potential of BRICS is far from exhausted
Not long ago, the economic growth of the BRICS proceeded at a much faster pace than that of the G7 economies. By now, BRICS growth has slowed sharply, along with all emerging markets.
According to summaries of 2013, Russia’s GDP will grow by 1.5–1.8 percent. In China and India, this figure will be higher, but likewise far from the old, sky-high peaks; in Brazil, there is no growth at all. American crises forecaster Nouriel Roubini has already prophesied a bleak future for the member-states of this bloc.
However, pessimists may have rushed to these conclusions. At least for the next 3–5 years, the bloc will remain the leader in global growth, and, already by next year, a slight slowdown will be changed to acceleration.
This is evidenced by the BRICS GDP forecast for the year 2014 (compiled by RBTH as a survey of analysts in early October), as well as on the basis of the International Monetary Fund’s October World Economic Outlook.
Analysts of Skolkovo’s Institute for Research in Emerging Markets, William Wilson and Christopher Hartwell, the chief economist at the British bank Coutts & Co, Mark McFarland, a senior analyst at the National Rating Agency, Maxim Vasin, a member of the Russian Presidential Academy of National Economy and Public Administration, Emil Martirosyan, and Investkafe analyst Timur Nigmatullin participated in the survey.
Experts’ optimism about the prospects for the BRICS is based on four factors — the most grave of which is the growth of internal consumption in the member countries of the bloc, which is due to the increase in population, changing consumption patterns and increased numbers of more affluent citizens.
"For many multinational corporations from the United States and Western Europe, the markets of the BRICS countries became not only production facilities, but also the largest markets for sales, while increasing the potential of successful startups in the IT-industry at the same time," says Martirosyan.
The second factor is transformation and modernization of the industry toward the environment, with a fast turnover of goods and services. The third factor is strong state involvement in the formation of economic policy and, as a consequence, a large share of public investment in various forms.
The fourth factor is expected to be the long-awaited release of the European Union from a two-year recession and the acceleration of the growth pace in the U.S. economy.
“The GDP of the EU in 2014 is expected to show growth of 1.6 percent, after falling 0.1 percent in 2013. The U.S. economy in 2014 is expected to grow by 2.6 percent, compared to about 1.9 percent in 2013," says Nigmatullin.
The leader in terms of GDP growth in the BRICS group in 2014 will continue to be China. Analysts at Skolkovo gave a minimum estimate of 7.4 percent, while a maximum estimate of 8.2 percent was given by International Monetary Fund analysts. Experts consider such factors as the growth of domestic consumption and the recovery of global trade to be the foundation of this growth.
In second place would be India. The maximum growth forecast of this economy was given by IMF representatives to be 6.23 percent. Analysts at Skolkovo were, again, the most restrained, giving only 4.5 percent as their estimate.
“India is in a mini-crisis that has the potential to become much more serious. Foreign direct investment in India has collapsed in the past two years,” Skolkovo analysts told RBTH. The recovery of the Indian economy will depend on the resumption of investment activity and an increase in government spending, believes an economist at Coutts & Co.
Opinions about this — which country will be able to take the third place among the BRICS countries in the coming year, Russia or Brazil — were divided. Mark McFarland believes that Russia will reach third place with a growth rate of 3 percent.
This would be almost two times higher than it is now, and it will be possible thanks to a substantial strengthening of domestic consumption and an increase in net exports of hydrocarbons.
Nigmatullin of Investkafe agrees with McFarland. "In Russia, a doubling of the rate of growth is due to an increase in consumer spending. Energy exports went to the plateau, and government spending is restrained, investment spending remains weak,” William Wilson and Christopher Hartwell say.
The IMF, as always, is even more optimistic and estimates the growth in Russia in 2014 to be 3.7 percent.
According to McFarland, for Brazil, an additional determining factor (in addition to the growth of domestic consumption) will be the expenditures on infrastructure. The expert is convinced that, in 2014, Brazil will show growth of only 2.4 percent. Skolkovo experts estimate slightly more, at 2.5 percent.
They believe that the probability for growth will be based on an increase in investment spending, but exports will be stuck on a plateau due to the low demand for Brazilian exports from China.
Another position is held by IMF experts and Investkafe analysts. They estimate that Brazil’s development will be more dynamic than Russia’s next year and will show a growth rate above 4 percent.
South Africa is also expected to pass the 3 percent threshold in terms of growth of GDP and, according to the IMF forecast, will achieve a target of 3.3 percent.
As experts predict, China will be the leader in the area of inflation containment: It is projected to be only on the level of 2.9 percent for the year 2014. For the other partners in the bloc, this figure will be significantly higher — 5.5 percent in Russia, 6 percent in Brazil and 8.9 percent in India, believes McFarland.
"The advantage of China over the BRICS partners is hidden in the fact that the predicted low inflation level will allow the Central Bank and the government of the country, in the case that it is necessary, to implement into reality a much wider range of measures for monetary-fiscal and tax-budget stimulus, without causing inflation as a side effect," he says.
In this respect, the most vulnerable is India, where the recent depreciation of the rupee has increased inflationary pressure and caused, as a result, the Reserve Bank of India to find it necessary to raise interest rates.
Thus, stabilization on the currency market of developing countries, which followed the recent sell-off, reduced the tension that was caused by the expected increase of interest rates in Brazil.
In addition, experts predict a growth of trade within the group. During the seven months of 2013, the volume of trade between Russia and the BRICS countries decreased by 0.6 percent (to $58 billion).
However, by the end of the year, backlog was expected to be compensated by stronger growth, and the summaries of 2014 are expected to show an increase between the range of 1-2 percent, believes Nigmatullin.
In total, the share of BRICS in the foreign trade of the Russian Federation is 12.5 percent. The main trading partner is China, with a share of 10.5 percent of the total foreign trade turnover of Russia.
Some trade expansion is possible due to differences in the structure of economies and weak duplication of production. “The low cost of labor in China means that goods are produced there according to the lower end of the price scale.
Russia is looking forward to exporting natural resources [oil, gas, and wood], India is known for its trade in services, while Brazil is a specialist in metals [mostly by rail ore] and agriculture,” say Skolkovo analysts.
Moreover, the partners in the bloc are gradually becoming a priority for each other. Russia announced a "U-turn to the East," which will inevitably lead to increased trade with China and India in the future, and Brazil became the largest supplier of meat for Russia.
Additional features would be provided by the contribution of the Customs Union, which would allow goods to enter the rather large markets of Kazakhstan and Belarus as well. Brazil, in turn, has also greatly expanded trade with BRICs, and China is reserving quite a noticeable place in the structure of its foreign trade.