Growth among the emerging economic powers of Brazil, Russia, India and China is slowing fast, dashing hopes that they will become much-needed drivers of the world’s fragile recovery.
Brazil on Wednesday slashed its benchmark lending rate by 0.75 percentage points to 9 per cent – marking the sixth cut in the past eight months – in an effort to strengthen an economy that is seeing its growth decelerate at an alarming pace. The country grew 2.7 per cent last year, compared with 7.5 per cent in 2010.
The Reserve Bank of India cut its rate a day earlier, as policy makers struggle to prop up an economy that is no longer growing fast enough keep up with its exploding population.
And in China, central bankers are loosening lending requirements in an attempt to keep the economy flush with credit to avert a hard landing.
The sudden slowdown in those countries comes as the European debt crisis and the United States’ halting recovery continues to weigh on global financial markets. The threat the BRIC deceleration poses to the global economy underscores just how reliant it has become on the vibrancy of those countries since the market meltdown in 2008 – driving demand for commodities such as oil and copper.
Brazil’s growth of 2.7 per cent last year was the slowest pace in Latin America. India is growing at roughly 6 per cent a year – well shy of the 9 per cent target set by the government. And China’s GDP growth slowed to an annual rate of 8.1 per cent in the first quarter. That was the slackest pace since 2009, when the world was still in the grips of the financial crisis.
Now, while Mark Carney and the Bank of Canada ponder eventual rate hikes to deal with an improving economy here, policy makers in the BRIC countries are making a different calculation: How to keep their economies from stalling.
“It’s a bad sign for the global economy,” said Badye Essid, an economist at the Centre for International Governance Innovation in Waterloo, Ont. “These countries have been playing an important role while Europe is in crisis and the U.S. recovery halting.”
Nonetheless, cutting rates is the right thing for these countries to do, Mr. Essid said, pointing out that lower rates will help drive domestic investment and consumption.
And with inflation fears fading, these countries have some breathing room to cut rates, Mr. Carney and his policy team pointed out this week.
“Economic activity in emerging-market economies is expected to moderate to a still-robust pace over the projection horizon, supported by an easing of macroeconomic policies,” the bank said.
Lumping all the BRICs together provides a warped view of what’s really happening in the global economy, argued Dan Ciuriak, former deputy chief economist at the Department of Foreign Affairs and International Trade.
“The BRICs are not all the same kind of economies. They’re all different,” Mr. Ciuriak said. “When they make the same moves, they’re not necessarily doing it for the same reasons.”
With the exception of China, Mr. Ciuriak pointed out that the BRICs don’t drive demand in most Western countries. Canada, he said, is still much more tied in to the fortunes of the United States and Europe.
In Brazil, the economy has slowed markedly. But the central bank rate cuts are as much about reining in punishingly high consumer interest rates as they are about spurring growth. Brazilians face some of the highest interest rates in the world on such items as credit cards and overdrafts – a relic of the country’s days of hyper-inflation.
Brazil’s economy faces other challenges, including high taxes and low investment.
India’s problems are almost exclusively domestic. The country’s GDP has nearly quadrupled since the early 1990s. But it needs that pace of growth, and more, to continue improving living standards.
Lower interest rates aren’t likely to do much about its hefty budget deficit, inadequate infrastructure and inefficient business sector – all factors that keep the economy from growing faster.
China, on the other hand, has none of those problems. Its government finances are in good shape and its domestic business sector is efficient. But for too long it has relied on export and big domestic infrastructure projects to drive growth. Now it needs to do more to drive its domestic consumption.