BRIC Outlook

Current Topics:

• Merrill Lynch: We introduce a proprietary indicator to monitor this cycle as it unfolds. In contrast to the developed world, BRICycle shows that this is still a mid-cycle slowdown, not a recession. The BRIC walls are about to be hit by the effects of the credit crunch. The outlook for exports is terrible and for credit growth is cloudy. Yet emerging markets have some tricks up their sleeves and can help stabilize the global economy. BRIC consumption alone contributed 110bp to global growth this year, against 20bp from US consumption. There is a lot more to come, in our view. Wage growth remains high, consumers underlevered and policies supportive. The global economy is intensifying its process of rebalancing. 78% of global growth is now coming from emerging markets, rising to 88% next year. Regionally, Brazil and India are currently the most resilient BRICs, with China and Russia showing signs of a slowdown
• Morgan Stanley: We have composed annual increases in official reserves into trade balance, FDI flows and everything else. Everything else’ could include portfolio flows,remittances, loans and any other type of capital flows.The presumption here is that the more a country is reliant on this last category of flows, the more vulnerable the currency is, in an environment of abating capital inflows. Looking at the BoP positions of the BRIC economies, a prospective decline in capital flows into EM might be most damaging for the INR and least so for the CNY. RUB looks somewhat better positioned than BRL. Thus, CNY > RUB > BRL > INR
• BRIC economies should see solid growth in 2008 although performance will not be as good as in 2007 – 2Q08 growth remained strong but some slowdown is expected among other challenges
• DB: If anything, most if not all BRIC countries currently seem to be at risk of overheating. While all are growing strongly, unless Brazil and Russia experience a productivity revolution, their economic growth rates will remain way below China’s and India’s.
• Goldman Sachs: Solid but not spectacular growth among BRICs will still be extremely helpful as we estimate the BRICs will contribute close to 50% of total global growth in both 2008 and 2009, as opposed to only 30% back in 2006
• Performance of BRICs exports varies: Brazil and Russia continue to see some significant gains y/y but mostly on the back of sharp price increases in commodities, while volume slowed in Russia and is actually negative in Brazil. China export growth remains high but is starting to slow while Indian exports are growing slower.
• Domestic demand remains quite strong in all of the BRIC economies although some signs of moderation can already be seen. As a consequence, imports will continue to play a crucial role, supplying local production. Overall, import growth will remain high especially driven by the sharp increase in commodity prices
• Inflation is a global threat and it is not different for the BRIC countries. The inflation outlook and the response to the worsening inflation is nonetheless different among those countries – Russia has the highest inflation figures and the least enforcing response, while Brazil has the lowest inflation figures with the most austere monetary policy response.
• Russia headline CPI at 15.1% is the top among many EME, followed by India (+8.2%), China (+7.7%) and Brazil (+5.6%).
• Russia: Inflation is the highest since 2002 with food prices way above earlier readings. High capacity utilization and low unemployment as well as negative real interest rates (-5.0%) might postpone any fast conversion of inflation readings
• China: Inflation figures already fell back slightly but more monetary tightening – including revaluation of the CNY would be needed to control inflation.
• India: Central bank cut the repo rate, more easing is expected.
• Brazil: Highest real interest rate among the BRICs and the most protracted tightening, it is expected to be the least vulnerable to the inflationary pressures.
  

On long-term trends:

• The rapid rise of the BRIC economies bears similarity to the post-war high-growth period of Japan and Korea. Comparing with these countries, China seems to be at an advanced stage of development. India, though a few steps behind China, is poised to follow a similar growth path. With a much higher income per capita than India and China, Russia and Brazil are ahead in the development stage (Goldman Sachs)
• We have used the penetration rate of refrigerators and TV sets to gauge how the standard of living has changed and, most importantly, what section of the population benefited from the rapid growth witnessed in the past decade:
• 1) It seems that the gap in living standard between the urban and rural populations has decreased since the mid-1990s, indicating that high growth did penetrate in the rural areas
• 2) Comparing the BRIC economies, it is not surprising that Brazil and Russia's refrigerator penetration rates are higher than that of India and China. However, it seems that China has caught up with Brazil in the past decade. India is strikingly behind the rest of the BRICs again suggesting that it is probably the BRIC that is most behind in its stage of development