What Next for the BRIC Economies in 2014?

The outlook for the BRIC for the second half of the year is as diverse as the grouping itself. Russia is set to suffer the worst performance of the BRICs, followed by Brazil. All four countries have seen their growth forecasts revised down since January, but for widely differing reasons.

Real GDP Growth Forecasts: 2014


Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

Brazil Runs Out of Steam

The Brazilian economy appears to have run out of steam in 2014 with real GDP growth revised significantly downwards since January. Our current estimate, of 1.4% for the year, is significantly lower than January’s estimate of 2.7%.

Despite the stagnating economy, price pressures remain elevated and interest rates have been increased 8 times in 13 months to 11.0%. This limits the government’s options for stimulating the economy and hampers one of its main engines of growth – private consumption – with households struggling with the twin challenges of higher prices and higher debt-servicing costs. This is a real problem in a country where credit has fuelled a consumption binge, which in turn has been a key (if unsustainable) engine of economic growth.

The outlook for Brazil remains further clouded by political uncertainty, with the elections due in October. Political uncertainty does nothing for investment, which is low and has been declining for three quarters. Overall then, the outlook remains uncertain with risks mainly on the downside.

Ukraine Crisis Overshadows the Russian Economy

Back in January we had some hope that 2014 would be the year that the Russian government began to enact serious reforms, but unfortunately that has not turned out to be the case. Russia has seen the greatest downwards revision to its GDP of the BRICs since January. First and foremost, the Ukraine crisis overshadows the Russian economy. There has been some impact from sanctions and this will escalate over time. In July, the US government announced new sanctions which will prevent some Russian companies raising finance in the USA and could lead to an increase in the cost of borrowing for all, due to the perceived increased risk of lending to Russian business. The Malaysian Airlines crash, which at the time of writing, is believed to have been caused by a surface-to-air missile, clearly has the potential to inflame the situation to new heights.

To add to Russia’s woes, the economy is beset by domestic problems which compound the Ukraine crisis. Inflation remains high contributing (along with stagnant incomes) to slow growth in consumption. This is linked and reinforced by low business confidence. Given these challenges it is unsurprising then that, with forecast real GDP growth of just 0.2% this year, Russia is set to be the worst performer of the four by a large margin.

Quarterly Real GDP Growth in Russia: Q1 2013 – Q4 2014


Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

Note: January 2014 data are forecast from Q4 2013 onwards and July 2014 data are forecast from Q2 2014 onwards

Cautious Optimism Returns in India

India saw a weak start to the year, but optimism has returned following on from election results which have given Modi a strong mandate and, as a minimum, take political uncertainty out of the equation. As a result, investment is likely to pick up in the second half of the year and business confidence is improving domestically.

However serious challenges remain, and turning the economy around is no small task for the government. Inflation remains stubbornly high and is a key challenge for the new government with wholesale prices surging in June on the back of food price rises.  The fiscal deficit remains a key concern, but in July’s budget, the government pledged a fiscal deficit target of 4.1% of GDP in 2014 – an ambitious goal – but a sign of the government’s commitment to tackling one of the economy’s key weaknesses.

The New Normal of Slower Growth in China

Last, but by no means least, we have also revised down our GDP forecasts for China following a weak first quarter. We now expect real GDP growth to come in at 7.2% in 2014. The good news for China is that the stronger external environment will support Chinese exports in the second half of the year and this has been seen in the rebound in industrial production. Q2 figures for real GDP growth also came in slightly higher than expected at 7.5% year-on-year.

However, real estate remains a threat to the economy. House price rises have slowed sharply on an annual basis, but the government needs to strike a balance between preventing a collapse and re-stoking price rises.

House Price Index in China: January 2012-December 2015


Source: Euromonitor International from national statistics

Note: Data are non-seasonally adjusted and from July 2014 onwards are forecast

Rebalancing continues at a gradual pace but consumption has remained strong – supported by a strong labour market and income growth. In 2014 we expect consumer expenditure to increase by 8.6% in real terms, driven by real gains in disposable income of 8.8%.

Further small-scale stimulus can be expected and this could change the picture – stimulus was one of the main drivers of Q2’s higher-than-expected growth. Nevertheless the heady days of +10% growth appear to be over for China.