Tables turn against emerging BRIC markets

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A recent article in Germany's Der Spiegel newspaper, headlined "Developing Economies Hit a BRICS Wall," captured the global economic question of the decade.

It's been 12 years since Goldman Sachs investment banker Jim O'Neil predicted that Brazil, Russia, India and China would take over global economic leadership from the over-indebted and increasingly uncompetitive Western developed economies. That prediction, which gained Mr. O'Neil rock star status on Wall Street, certainly proved prescient. Between 2001 and 2013, the collective GDP of those four countries grew 240 per cent from $5.6-trillion (U.S.) to $13.6-trillion.

Now, a strengthening West and flagging BRIC performance are spawning predictions that 2014 will be the year when the tables are turned. Just last week, the British Centre for Economics and Business Research lowered its predictions for BRIC growth. Brazil's slide from a go-to country for foreign investors to struggling courtier was illustrated by President Dima Rouseff's speech at the Davos World Economic Forum, where she beseeched industry leaders to "bear in mind a medium- and long-term horizon in our reviews."

Russia's already uncertain outlook now faces the impact of tightening economic sanctions.

India's banks are struggling with a mountain of bad loans and corruption is rampant. Going into the recent national election, nearly a third of parliamentarians were facing criminal proceedings. This, along with class based discrimination, violence against women and abysmal law enforcement, continues to deter potential investors. Now the hopes of Indians fall on the shoulders of newly elected President Narendra Modi, who vows dramatic reforms.

That brings us to China, the fourth and mightiest BRIC. A recent report headlined, China's ticking time bomb by Globe and Mail reporters Nathan Vanderklippe and Eric Reguly highlighted the issues that I personally observed during my many visits there as a Director of China's largest foreign bank. These include massive over-building of infrastructure and factories often in collusion with corrupt public officials bribed to circumvent environmental laws and obtain financing, leaving hundreds of billions of dollars in bad loans sitting as ticking time bombs on the balance sheets of government banks.

China's growth rate, which hit a high of 14 per cent a few years ago, is expected to drop to 7 per cent in 2014. Likewise, India's apex growth rate of 10 per cent has fallen to half that level. Brazil's growth rate, which peaked at 6 per cent, is expected to be under 2 per cent this year. The Economist Intelligence Unit predicts that the BRIC's $98-billion growth lead over the G4 (U.S., Japan, Britain and Germany) in 2013 will reverse to fall $44-billion behind the G4 this year. That's a massive year over year reversal of $142-billion in favour of the G4.

The United States is expected to add more to global economic growth than China in 2014 and Japan will add more than India. Falling energy costs, due to domestic oil and gas shale production, have helped make American manufacturing more competitive. Over the past two years, 4.3 million jobs have been created. Personal debt is falling, consumers are spending and businesses are investing some of their enormous cash reserves.

Japan's new Prime Minister Shinzo Abe's "Abenomics" economic plan has started to lift the country out of deflationary stagnation. Britain has staged an impressive economic resurgence and Germany continues its solid performance. Even in battered Europe, there are positive signs. Loosening of rigid labour laws are improving business productivity and sovereign bond yields have fallen sharply.

So is this, as an Economist report stated, the West's turn. There's little doubt that 2014 will mark a hiatus in the economic rise of the four countries that dominated global economic growth for the past 12 years, and that Western developed countries are shaking off some of the self-inflicted wounds holding them back.

But lest we lapse into self-congratulatory schadenfreude, let's remember that world economic growth is not a zero sum game. In a globalized world, prosperity in any single country contributes to the prosperity of all others. The crucial importance to Canada of resource exports to China are a clear illustration of that reality. Canadians would be wise to hope that China, in particular, navigates its challenges successfully.