What explains the slowing growth of the five leading emerging economies known as the BRICS? The International Monetary Fund (IMF) examines that haunting question in its latest World Economic Outlook. The cooling of the economies of Brazil, Russia, India, China and South Africa “has been quite sizable,” with GDP growth rates 1.5 percentage points to 4.25 points lower in 2013 than they were in 2011. The IMF looked to history for reasons why, since “slowdowns are hardly unprecedented.” But history never repeats itself exactly. This time around, the IMF finds, some slowdowns are cyclical and others structural.
“Brazil’s latest growth slowdown is actually mild compared with earlier two-year slowdowns (since 1980, shaded periods). South Africa, the slowdown is smaller than two-thirds of the earlier slowdowns. Similarly, for China, the current slowdown is (so far) smaller than the decelerations seen in the late 1980s and 1990s.”
With BRICS economies coming off cyclical peaks following their post-2008 financial crisis stimulus, the IMF, not unsurprisingly, finds that there is a cyclical component to the slowdown in all five. It is in the mix with structural factors that the differences between the economies lie. In Russia and South Africa, cyclical factors account “for the bulk of the deceleration;” while in Brazil, India and China it explains “about half” of the slowdown, the IMF says.
What are those cyclical factors that have hit the BRICS so hard? Since 2011, the effects of the stimulus wound down, global export demand slowed, and commodity prices began to weaken.
Composition of 2011-2013 Growth Changes (percentage points)
What accounts for the other half of the slowdown experienced in India and China is that potential growth began to fall – it represented an additional 1 percentage point to 1.5 percentage points of the fall in annual GDP growth. The causes of that, the IMF says, is the structural impediments to economic reform which have hit the economies of India and China the most.
The IMF uses India to illustrate the point. “Potential has been undermined by supply bottlenecks arising from problems in the regulatory framework for mining, energy, telecommunications and other sectors; a consequent slowdown in permits and project approvals; and overstretched corporate balance sheets,” the Fund explains in the section of the report which focusses on the BRICS.
One reason that this round of slowdowns in emerging economies has attracted so much attention is that its severity was unanticipated. The Fund also makes the point that lost potential growth can be recaptured. Indeed, it expects that to happen in Brazil, India and South Africa in the medium term. “Only China and Russia are expected to have persistently lower rates of economic growth,” says the IMF.
That is because “time is running out on their current growth model,” the Fund says. China has been reliant on export and infrastructure-investment driven growth for three decades, but now, “without fundamental reform to rebalance the economy toward consumption and stimulate productivity growth through deregulation, growth is likely to slow considerably,” the Fund warns.
The story, the IMF says, is similar in Russia:
For some time, the country has been held back by inadequate physical infrastructure, including its transportation and electricity networks; overreliance on commodities; and a weak business climate. The economy has nonetheless managed to grow, on the back of rising oil prices and by using up spare capacity. But this model now seems exhausted.
As the table below shows, growth in both countries is expected to become considerably slower. In the meantime, the big question remains, what is the future of the BRICS?
Five-Year-Ahead Forecast Growth and Average Growth from 1998-2013 in the BRICS
Read more on the IMF’s World Economic Outlook: Downbeat IMF sees a shift in global economy still stuck in low gear
