Amidst the focus on the US recovery, the turbulence in the Middle East, and concerns about rising oil prices, there hasn’t been much attention on the news that Brazil has become the 5th largest economy in the world at around $2.2 trillion by the end of 2010. The country’s 7.5 pct real GDP growth, together with the strength of the Real, has delivered this result much sooner than we had originally envisioned, and six years earlier than the optimistic projections outlined by President Lula in 2009. …
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Author: Jim O’Neill – Chairman, Goldman Sachs Asset Management
This confirms two major BRIC achievements in 2010. As we know, China easily overcame Japan to become the world’s 2nd largest economy at around $5.9 trillion. Two of the four BRIC nations are now in the top five largest economies in the world.
Back in 2001 when I first coined the term, in the original paper introducing the importance of the BRIC economies, even the most optimistic of the alternative scenarios I looked at suggested that China might become as big as Germany, but no larger than that. Brazil didn’t seem as though it would be anywhere near the G7 economies this soon. In their key paper in 2003 when we first looked at the 2050 possibilities, Dominic Wilson and Roopa Purushothaman projected that it would take until 2015 for China to overtake Japan. And, they projected that it would not be until 2018 that Brazil might overtake Italy, and another few years until it matched France and the UK.
Amongst the many reasons why the BRIC thesis has become so powerful is because we suggested that the combined GDP of the four BRIC countries could match the G7 by 2040, subsequently revising this trajectory to earlier periods, with the last undertaken back in 2008 suggesting it might happen next decade. With news that Brazil is now slightly bigger than France and the UK so soon, it looks as though the BRIC economies are well positioned to achieve this, and with it, for them to overtake the US by 2018, the latest estimate from the Economics department.
In terms of overall BRIC performance in current US$ terms, their combined GDP at the end of 2010 has increased to just more than $11 trillion. Because of China and Brazil, this is more than double the nominal GDP assumed back in 2003, with China being two times larger and Brazil a remarkable three times. The latter has been greatly helped in the past couple of years by the remarkable strength of the Real, which has contributed so much more than expected.
That said, Brazil is unlikely to continue to grow as strongly as 7.5 pct in the future, and the consensus is assuming a slowdown to the 4-5 pct range this year, as is the Finance Ministry. It remains the presumption of most Brazilian analysts that Brazil’s underlying trend growth rate is close to 4 pct. In the new research we have published at GSAM, Anna Stupnytska, James Wrisdale and I have assumed a slightly more optimistic trend growth of 5 pct, but it is difficult to be too confident. The impressive structural break experienced by Brazil in the latter part of the last decade in which, in addition to retaining most of the low inflation achievements of the decade as a whole, resulted in the country managing to throw off the global credit crisis in a manner almost unthinkable of Brazil of the past. It is quite feasible that Brazil’s growth trend might actually be stronger. And, it is difficult to know whether the country is towards the end of the benefits of low inflation.
Of course, as most of the consensus Brazilian forecasting community believe, undertaking measures to reduce government spending, reducing real interest rates, taking pressure off the probably overvalued Real, and allowing the private sector more scope to invest, are key necessities for Brazil to enjoy another decade anything close to that of the last one.
CHINESE AUTHORITIES MAKING THEIR PRIORITIES CLEAR.
When I returned from a long trip to both India and China in late Autumn, I wrote that for the first time since I had thought of the BRIC acronym, it was conceivable that India was closer to a period where it might exhibit stronger real GDP growth than China. One of the reasons for this is that I suspected Chinese policymakers would be more focused on the quality of growth than the quantity. There were some signs that the leadership might go as far in signaling this by adopting a lower “target” for GDP growth of 7 pct for their 12th 5-year plan. This is indeed what has now been confirmed in a speech from Premier Wen last Monday. While formal targets should be really regarded more as “guidance”, nonetheless, it is very interesting to observe and is consistent with the government’s desire to rebalance the economy away from less value-added exports, investment and heavy manufacturing, towards more domestic led consumer growth. It is also more consistent with the need to keep inflation under control and allow a more even distribution of income growth. In addition, it is consistent with the hopes for China from the rest of the world for a lower balance of payments current account surplus. Finally, it is also consistent with a China that is eager to improve its environment and reduce its intense thirst for natural resources.
It should be remembered that, over the past 5 years, China grew around 11pct, much higher than that assumed in the past five-year plan of around 8 pct. So we need to be careful in assuming such targets are going to be that critical in what happens.
This morning, the Chinese leadership has been unveiling its desires for this year, stating an 8 pct GDP target and an inflation target of 4 pct. These should be seen against the background of the five-year plan and the underlying policy goals.
From a markets perspective, it is interesting amidst all the Middle Eastern turmoil, that there are lots of nervous eyes aimed towards China about whether any protests erupt there. Partly due to their own concerns, there are signs that policymakers are being extremely vigilant to stop large groups from gathering. What is even more interesting is that in contrast to these nervous eyes and the weakness of many Middle Eastern equity markets, the Chinese market has been relatively calm since their New Year celebrations. Indeed, it seems as though local Chinese investors are more relaxed about the MENA instability and the risks of domestic inflationary pressures. I am developing an increasing hunch that the Chinese inflation challenge might be overcooked by foreign observers and, if this turns out to be the case, the Chinese equity market might surprise people in coming weeks. We shall see.
THE GROWTH MARKETS REMAIN KEY.
While the big story for this year is likely to remain the impressive signs that the US economy is recovering its poise, this underlying thematic story is the “Growth Markets” as we have defined them in GSAM. As we have written, we have decided to call the four BRIC economies, as well as four of the so-called N11 economies, Indonesia, Korea, Mexico and Turkey as Growth Economies. The cut-off point we chose to distinguish them from more traditional emerging economies is their base size, and we have chosen a requirement that the economy must be at least 1 pct of global GDP.
Many observers continue to seem a bit confused about aspects of the Growth Market concept. We have not introduced any new acronyms, and we are not trying to downplay the N11 Group. What we are trying to do is to help people see the importance of these economies and to be less worried about undertaking business and investing in them. There are a number of other economies that have the potential to join the “Growth Market” definition in the future including some of those in the N11 and some that are not. For example, from within the N11, possibilities include the Philippines, Nigeria, and interestingly, Egypt and Iran. From outside the N11, Saudi Arabia, Poland and South Africa also have the potential to become “Growth Markets.”.
The simplest way of demonstrating the power of the current eight-country Growth Market group is to consider potential nominal GDP growth this decade. >From our numbers, from 2010 to 2019, the combined nominal GDP of the eight Growth Market countries may rise by around $16 trillion. This could be more than five times that of the increase in the US. It is true at least ¾ of this GDP increase will come from the four BRIC economies, and indeed, ½ of it alone from China. The increase of the other four as a group – Indonesia South Korea, Mexico and Turkey – or MIST, as some media seem to think I have dubbed them (rather like that one!) will be similar to each of that of the US and the Euro Area. In a world where these economies are having so much influence on global economic developments, it seems increasingly odd to regard them as emerging markets. It is both inappropriate and inopportune.
A FEW MORE WORDS ABOUT THE MENA REGION.
Events still seem to be extremely unstable in the Middle East and North Africa, with Libya being especially troubling of course. In addition to the consequences for crude oil prices, markets also seem quite focused on possible protests in Saudi Arabia this coming week.
As I wrote last weekend and elaborated about further in an article for the UK Times newspaper on Friday, I believe that the underlying dynamics of this revolution in the MENA area are positive. The combined population of the region is in the vicinity of 400 million; more than double that of Brazil, with two of them, Iran and Egypt, representing about 20 pct of the total group. While the history of the region is fraught with problematic governance, this revolution seems to be essentially driven by a desire for better opportunities and has little to do with religion or anti-Western feelings. In this regard, it is fascinating to see both Egypt and Tunisia quickly responding to their populace in replacing key officials associated with failed leaders.
It is fascinating that the US markets remain less than 2 pct of their highs of the year, despite the MENA crisis and the overwhelming concerns that many express. My suspicion is that the explanation simply reflects that the world economy’s growth trend is rising as well, as the evidence improving further about the current cycle’s strength. Without an early move to significantly tighten monetary policy, and competition from higher real bond yields, I remain unconvinced by many arguments calling for an end to this bull market. Other central banks joining the ECB in their message last week that they are planning to tighten soon would be amongst the things that might get me to re-think my position. This remains a key issue to focus on, although of course, even more so for government bonds than equities.
Source: ETFWorld -Goldman Sachs Asset Management