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The BRICs have cracked: Emerging market update

April 12, 2016

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Executives looking to engage in international business are keeping their eyes glued to the global markets right now, and many do not like what they see. The emerging markets, which pushed global economic growth to new levels for over a decade, have been struggling for the past several years. This is specifically true of the BRIC countries: Brazil, Russia, India and China.

The BRICs were supposed to power an unstoppable wave of near-double-digit growth, and they did for quite a while in the early 2000s. But it’s impossible to sustain this type of rapid growth indefinitely.  The overall emerging market growth rate dropped from 7.6 percent of GDP in 2010 to 3.7 percent in 2015, marking the fifth consecutive year of decline.

The current state of the BRICs and the emerging markets
While BRIC was a catchy acronym used by economists to refer to the leading emerging market economies, it’s no longer possible to look at these individual countries as a single block that all move in the same direction. Brazil and Russia entered 2016 in full-blown recessions, and China continues to struggle with its slowing growth rate, while India’s growth is projected to remain robust.

Emerging market countries have become independent economies with varied narratives: Brazil is down; Mexico is up; China has slowed; and India, Vietnam and the Philippines are rising. Simply put, emerging markets no longer rise and fall as a group.

China’s impact

The economic slowdown in China has depressed most commodity prices, which affects economies around the world. This decline in prices has had a particularly devastating impact on large commodity exporters like Brazil and Russia. With commodity prices plummeting, a multitude of other negative issues have been exacerbated in the process (think geopolitical). On the opposite side of that collapse, however, energy importing economies like Taiwan, South Korea, India and Mexico have been positively affected by these price drops because raw materials have become cheaper.

China’s economic outlook is concerning because it has grown to become not only the largest emerging market economy, but the second largest economy in the world. A significant slowdown in China will have a great impact on global markets for some time.

With slow growth, China is looking to shift its economic model and transform into a middle-class, consumer-oriented nation, rather than a manufacturing- and export-based economy. This transformation may be easier said than done, though, as Japan, South Korea and Singapore are the only Asian nations to have successfully made the leap to middle-class economy. For China to make this transition, it will need to effectively manage the gradual slowdown and rebalance its economic activity.

The most significant challenge facing China’s shift to a consumer-based economy is that its household savings rate is more than 30 percent. To put this in context, the savings rate in U.S. households is only 5-6 percent, according to a Bloomberg report. For China to successfully make the transition, its government will need to convince the Chinese people to open their wallets and reduce savings.

Don’t underestimate the ripple effect
China is just one example, but its impact on the global economy is a reminder that the health of emerging market economies is critical. In fact, as 70 percent of global growth and 35 percent of global Gross Domestic Product now come from emerging economies, their importance is clear. That is why the ripple effect of a meltdown in a major emerging market like China would be so significant.

The size and importance of the emerging market economies cannot be overstated. And while some economists want to replace the term BRIC with TICK (which replaces Brazil and Russia with Taiwan and Korea) to better reflect the newest emerging market leaders, these markets should be regarded as sophisticated independent economies rather than lumped together in an acronym. In fact, Goldman Sachs, the company that originally coined the term BRIC, recently closed its BRIC fund and folded the investments into larger emerging market funds.

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Companies of every size face a formidable task as the world economy matures. Clark Schaefer Hackett’s focus is on middle-market companies and we understand how to provide efficient and cost-effective service to addess your organization’s international needs. For advisement on the global market and its impact on your business, please reach out to your CSH advisor or Dan Fales, chair of the CSH International Business Service team, at [email protected]

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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