A domino effect in the BRICS: is growth on the horizon?
17.03.2016 | Economy
Until just a few years ago, Brazil, Russia, India, China and South Africa, grouped together under the term BRICS, were frequently put forward as models of economic success. They resisted the economic crisis and confidently recorded strong growth as the United States and Europe declined.
But today, the Chinese stock market is crashing, the ruble has plummeted, Brazil is seeing a combined economic and political crisis, while growth has waned in South Africa. Only India has managed to steer clear of the collective decline. Are we witnessing a domino effect? Let’s take a look at these major economic players.
At the end of 2015, the International Monetary Fund (IMF) forecasted “disappointing and uneven” global growth in 2016. Days later, the World Bank cut its 2016 growth forecasts in its publication “Global Economic Perspectives ”. At the center of these concerns: the BRICS.
China’s economy suffers exhaustion
For months the Chinese economy has shown several signs of exhaustion. With the slowdown in Europe and the United States, the country known as “the world’s factory” must now rely on domestic consumption as its primary source of growth, while the country is also suffering from industrial overcapacity.
The result is Chinese growth that continues to slow. The IMF has forecast a Chinese growth rate of 6.3% in 2016, its lowest level in 25 years. And, of course, “what happens in China has repercussions for the entire world economy,” says IMF chief economist Maurice Obstfeld.
Brazil slides into recession
Most vulnerable to the Chinese slowdown are countries that export raw materials. Brazil is one of China’s chief suppliers, while in return China is also its top trade partner. The result is that the world’s 7th largest economy has seen its growth decline continuously from a spectacular +7.5% in 2010, to just 0.1% in 2014, before going negative at -3% in 2015.
The IMF has forecast a second year of recession in 2016, with Brazilian growth at -1%. Rocked by a corruption scandal involving the state oil company, the country’s political troubles further complicate the situation.
South Africa loses steam
A similar scenario is unfolding in South Africa – the continent’s most industrialized country is hurting from declining raw material prices and the Chinese slowdown. Growth has tumbled from an average of 4.8% between 2004 and 2008, to 1.4% in 2015. And the IMF is forecasting growth of only 1.3% in 2016. With business down in manufacturing, mining and agriculture, the unemployment rate has climbed to 25%, while social unrest and instability has scared off investors.
Russia continues to struggle
For its part, Russia, like all oil-producing countries, is grappling with the drop in oil prices . And the situation is exacerbated by Western sanctions placed on the country for its role in the Ukraine crisis. According to the IMF, Russia should see another year of recession, at a level of nearly 4%, in 2016.
India maintains steady growth
India is in much better shape. The country will see its growth rise 7.8% in 2016 (up from 7.3% in 2015) according to the World Bank. In addition, at the Global Business Summit in New Delhi in January, the government announced direct investments in the country had grown by 39% in 18 months. The result is that India has overtaken China to emerge as the world’s top destination for foreign direct investment.
A threat to the world economy?
In any case, the global state of the BRICS has many countries worried. “The forecasts show that a 1 percentage point decline in BRICS growth could, over the following two years, reduce global growth by 0.4%, growth in other emerging markets by 0.8%, and growth in frontier markets by 1.5%,” World Bank economist Franziska Ohnsorge explains.