The once mighty BRICs just aren’t what they used to be.
More than 15 years ago, Goldman Sachs economist Jim O’Neil popularized the term BRIC for the growth prospects of the emerging economies of Brazil, Russia, India and China. Western brands and retailers set their sights on the fertile ground and growing earning potential of these countries’ consumers.
The Great Recession certainly changed many a global fortune, while political unrest added salt to the wound. And since then, Brazil and Russia have faltered, China has wavered and India has suffered some growing pains but remains likely the strongest player.
China is still the world’s largest supplier of apparel and textiles, producing roughly 40 percent of the world’s output in the sector, but its meteoric rise has stagnated as costs have risen substantially and the country’s factories aim to manufacture more for domestic consumption. For the first time in six years, in 2015, China textile exports fell, dropping 5 percent to $286.8 billion.
India is still a top soft goods supplier and is poised for growth. The Indian textiles industry, currently estimated at roughly $108 billion, is expected to reach $223 billion by 2021.
Brazil still has a fairly vibrant textile and fashion sector that has struggled along with the country’s overall economy, with 1.5 million direct employees in the $36.2 billion industry, making it the second largest employer in manufacturing.
According to the International Monetary Fund’s 2017 Global Economic Outlook, all BRIC economies enjoyed a period of strong income growth in the early 2000s, due to a period of favorable external tailwinds. The gap between their average income per capita and that of the U.S. narrowed significantly between 2002 and 2014. In China and Russia, per capita income as a share of that in the U.S. increased 13 percent and 26 percent, respectively, during that period.
How times have changed.
The BRIC mystic
For IHS Markit chief economist Nariman Behravesh, the allure and mystic of the BRICs was never based in reality, and could never be maintained, although China and India remain major global forces.
“I’m a firm believer that the emerging markets, including the BRICs, are the future in the sense that that’s where most of the growth in the global economy is going to occur, partly because that’s where the population growth is going to be, but also partly because they’re catching up. That’s the promise,” Behravesh said in an interview with Sourcing Journal. “That said, the kind of growth we got in the 1990s and 2000s was due to special factors and I think some people then got carried away and said these countries are going to grow very rapidly going forward.”
He said there were three things that drove that growth: hyperglobalization–the development of global supply chains and offshoring, for example; the commodities price boom, and the credit bubble – “There was a lot of money slushing around the global economy and a lot of it ended up in the emerging world,” Behravesh said.
“Those conditions are no longer there–globalization slowed way down, commodity prices crashed and credit conditions have worsened, although it’s starting to go back into some of those countries,” Behravesh continued. “I still am a believer that the emerging world will grow probably one and a half to two times as fast as the developed world. But it’s not going to be three times or three and a half times, which is what it was in the early 2000s.”
According to the IMF outlook, the world economy gained speed in the fourth quarter of 2016 and the momentum is expected to persist. Global growth is projected to increase to 3.5% in 2017 and 3.6% in 2018 from an estimated 3.1% in 2016.
“Activity is projected to pick up markedly in emerging market and developing economies because conditions in commodity exporters experiencing macroeconomic strains are gradually expected to improve, supported by the partial recovery in commodity prices, while growth is projected to remain strong in China and many other commodity importers,” the IMF said.
The downward revisions to growth forecasts for emerging market and developing economies result from a weaker outlook in several large economies, especially in Latin America and the Middle East, reflecting continued adjustment to the decline in their terms of trade in recent years, oil production cuts, and idiosyncratic factors. The 2017 and 2018 growth forecasts have been marked up for China, reflecting stronger-than-expected policy support, as well as for Russia, where activity appears to have bottomed out and higher oil prices bolster the recovery.
India remains the fastest growing economy in the world—economic fundamentals are strong and reform momentum continues.
A Goods & Services Tax plan is on track for implementation and is expected to yield substantial growth dividends from higher efficiencies, and raise more revenues in the long term, according to a World Bank report. While agriculture growth delivered in 2016-2017, the report notes that investment growth remains subdued, partly because of banking sector stress.
The report also highlights the low and falling participation of women in the labor market. For India to achieve higher growth, it needs to create safe, flexible and well-paying jobs for a large number of women who are currently not in the labor market.
The fundamentals of the Indian economy remain strong, with robust economic growth, strong fiscal consolidation, low current account deficit, higher agricultural output, growing FDI, low inflation and higher wages in rural areas, according to the report. Favorable monsoons boosted agriculture and rural consumption, while urban consumption remained robust and exports rebounded in the third quarter of 2016-2017.
“India remains the fastest growing economy in the world and it will get a big boost from its approach to GST which will reduce the cost of doing business for firms, reduce logistics costs of moving goods across states, while ensuring no loss in equity,” said Junaid Ahmad, World Bank country director in India. “Low female labor force participation, however, remains a serious concern. Higher level of women participation in the economy can help propel India closer to double digit growth.”
The report is also optimistic that growth in private investments is likely to pick up once there is greater certainty on the global outlook, as well as when implementation of the GST is more advanced.
“The recent push to increase infrastructure spending and to accelerate structural reforms will eventually drive a sustained rebound of private investments,” said Frederico Gil Sander, senior country economist with the World Bank.
Growth in China is projected at 6.6% in 2017, slowing to 6.2% in 2018.
Chinese authorities are expected to maintain emphasis on protecting macroeconomic stability in the run-up to the leadership transition later this year. Progress with demand-side rebalancing and reducing excess industrial capacity has continued, but so has the reliance on stimulus measures to maintain high rates of growth and the Chinese economy’s risky dependence on rapidly expanding credit, intermediated through an increasingly opaque and complex financial system, the IMF noted.
External triggers, such as a shift toward protectionism in advanced economies or domestic shocks, could lead to a broader tightening of financial conditions in China, possibly exacerbated by capital outflow pressures, with an adverse impact on demand and output.
China has been the focus of a potential global luxury economy revival. In its latest global personal luxury goods market report, Bain & Company said China, which began to rally last year after a three-year decline, is expected to enjoy a 6 percent to 8 percent increase in luxury sales. The uptick will be driven by purchases on its home turf as shoppers find the price differentials between home and abroad narrowing.
Chinese consumers are expected to boost purchases in Europe as safety concerns subside, and though the U.S. remains a top destination, the strong dollar will keep some Chinese at bay.
In Brazil, the pace of contraction has diminished, but investment and output had yet to bottom out at the end of 2016, according to the World Bank. Inflation has continued to surprise on the downside, allowing for prospects of faster monetary easing. Growth is projected to recover gradually and remain moderate.
Against this backdrop, Brazil’s macroeconomic prospects hinge on the implementation of ambitious structural economic and fiscal reforms, the World Bank noted.
“To underpin medium-term fiscal consolidation, the focus should be on reforms that address unsustainable expenditure mandates, including in the social security system, but there is also merit in undertaking actions to achieve a more front-loaded reduction in the fiscal deficit,” the World Bank said. “Reforms to boost potential growth are needed not only to restore and improve living standards after the deep recession, but also to facilitate the fiscal consolidation. Imperatives for lifting investment and productivity include addressing long-standing infrastructure bottlenecks, simplifying the tax code and reducing barriers to trade.”
Brazil is expected to emerge from one of its deepest recessions, with growth forecast at 0.2% in 2017 and 1.7% in 2018. The gradual recovery will be supported by reduced political uncertainty, easing monetary policy and further progress on the reform agenda, the World Bank added.
The Russian Federation is showing encouraging signs of overcoming the recession it entered in 2014, the World Bank said. The economy is projected to grow 1.3% in 2017, and then 1.4% in both 2018 and 2019, according to the World Bank’s latest Russia Economic Report.
Growing macro-stability, driven by the government’s policy response package of a flexible exchange rate policy, expenditure cuts, and bank recapitalization has helped facilitate the adjustment of an economy hit by the double shocks of low oil prices and restricted access to international financial markets. The positive terms-of-trade effect from rising oil prices, coupled with more stable macroeconomic conditions, are expected to drive Russia’s economic recovery.
“Macro stability and oil prices are the main factors driving this recovery,” said Apurva Sanghi, World Bank lead economist for the Russian Federation. “Successful adherence to the 2017–2019 Budget Law will be key for laying the proper groundwork for the planned fiscal rule, which will subsequently reduce the sensitivity of the budget to oil prices and improve economic predictability.”
Consumption is expected to drive growth in 2017-2019, with investment playing a supporting role, the report noted. Improving consumer sentiments and better credit conditions are all expected to lead to a growth in private consumption of 1.8% in 2017 and 2.5% in both 2018 and 2019. In addition, the 2018 FIFA World Cup, which will take place in Russia, could further support public investment.
BRICs old and new
For his take, Behravesh said, “China and India both have problems, but by most measures these are successful emerging markets…Russia and Brazil have serious structural problems, the vulnerability to the commodity cycle, and in the case of Russia, you have regional conflicts.”
“Our view is that India will grow faster than China,” he added. “However, India has the vested interests that don’t want reforms,” internally or externally, and “the infrastructure is terrible,” but the country has a strong legal system that makes it easier to do business there.
The potential is always there in Brazil, if they could find decent leadership and were able to tackle some of the problems, according to the report, “then this is a rich country that could do well.” In Russia, “whatever wealth there is, is being extracted by a very small number of people.”
So what countries could be the next gems? Behravesh cited Vietnam and Indonesia as among the top, along with Bangladesh in Asia. South Africa, at one time called the fifth BRIC, still has potential, and Eastern European countries of Poland, the Czeck Republic and Romania have stable, growing economies.