Yesterday we wrote about reserve accumulation among the BRICS. Todday we are going to discuss the possibility that the BRICs are already on their way towards recovery. Indeed, their assets markets are already pricing this outperformance and in most of the cases, the strong inflow of foreign exchange into those countries have already triggered CB intervention and international reserves accumulation
While it is too much of a stretch to call the current situation a decoupling we can be sure that China, Russia (to a less extent), Brazil and India are on their way towards recovery. EM equities have greatly outperformed their developed world peers since the start of the year, accelerating since risk appetite began to improve in March. Different from some professional pessimists, China and India will grow strong this year and we believe on the possibility that China presents a growth rate of more than 8% in 2009. It is also possible to observe both China and India growing 10% in the next five years.
On the external side, the BRICs are buying dollars at a very fast pace as a way to prevent their domestic currency to appreciate. According to Bloomberg, Brazil bought the most dollars in a year, India’s reserves gained the most since January 2008 and Russia added the most foreign exchange since July. Leaders from China, Brazil and Russia are suggesting to create an alternative to the dollar. While Russia is proposing the creation of another currency that would circulate within the BRICs, China and Brazil are looking into ways of using their own currencies when both countries are trading.
What about the perspectives for growth?In India, the economy expanded 5.8% in Q1 2009 after expanding 5.3% in Q4 2008. The economy was boosted by the government stimulus measures implemented later last year to deal with the crisis. In 2009, it is possible to observe India growing around 4.9% and in 2010 already growing around 9%. In India, economic indicators like exports and industrial production are still contracting and capex and consumption have slowed sharply. On the other end, capital inflowshave resumed boosting the currency and stock market, PMI has improved and OECD leading indicator shows signs of approaching a bottom. Some improvement in global economy will be a positive for continued capital inflows and easing of export contraction. Central bank measures are improving credit flow in the economy.
On China, we agree with Jim O´Neal from Goldman Sachs who says that China will lead the global recovery, returning to trend growth by mid-2010, much earlier than any other country. India and Brazil should return to trend in 2011, also more rapidly than most other emerging markets. In addition, while the momentum is strongest in China, all three countries are poised to close their output gaps quickly. This rapid narrowing of output gaps is due to recent above-trend growth as well as the relatively quick return to trend growth forecast for these countries. Russia lags the other BRICs as it is set to return to trend.
While it is true that China has many capital account restrictions and is not as financially integrated as Brazil, China is the country with the largest inflow of FDI among the EM. Besides that,Chinese government has become the single largest holder of official FX reserves and of US government debt securities.We expect China to grow between 6 and 8% in 2009. There are many indicators saying that China is recovering. For example, manufacturing accounts for 40% of China's GDP and until April, the PMI was in contraction as external demand for Chinese goods fell and domestic demand softened. Now, the PMI, an indication of manufacturing activity, have risen above the 50 threshold which indicates expansion.
Russia is the worst performer among the BRICs. Russian GDP fell 9.5% in Q1 2009 YoY, and 23.2% since Q4 2008. The fall is generalized among the main categories. Not only we have observed a marked fall on investment but also on consumption as well as industrial production. On Q1 2009, Russian GDP already felt 9.5% and 23.2% since Q4 2008. Russia should have a marked negative growth in 2009 of -4.5%.
The Brazil scenario is not as bleak as the Russian one. Indeed, Q1 2009 GDP contracted 1.8% y/y and 0.8% q/q (Q4 2008 -3.6% q/q). Consumption declined from 2.2% y/y in Q4 to 1.3% while private investment went from 3.8% to -14.0% y/y in Q1 2009. Exports contracted 15.2% while imports were down by 16%. On the supply side, Agriculture went from +2.2% to -1.6% y/y while industry and services grew by -9.3% and +1.7% from -2.1% and +2.5% in Q4 2008 respectively. While the fall on investment was significant, it is possible to observe growth to reach 0 in 2009. It will be very unlikely that Brazil experience negative growth in 2009.
Some encouraging, albeit tentative, signs are emerging that the contraction in economic activity is moderating. Recent data on retail sales and consumer and business confidence in some advanced and emerging economies suggest that the rate of decline of private consumption, exports, and industrial production may be easing. According to the IMF with contracting world trade, slowing domestic demand, and sharply reduced access to external financing, emerging market growth is expected to decline sharply to 1.5% in 2009, from 6.1% in 2008. However, the dynamism of China, India and Brazil are shining brighter than the remaining emerging world and we expect the BICs (without the R for Russia) to present an outstanding rate of growth in 2009.