Smack! The BRICs Hit a Wall of Their Own Making
After powering the world economy since 2008, developing markets like Brazil, Russia, India and China might be teetering.
(Reuters)
As you may have noticed, the world as we know it did not end in 2008. We can thank Western policymakers who stared into the abyss of a second Great Depression and threw just enough money at our problems -- and developing markets that powered us through the slump. But now both of those are looking less true. It might be time to buckle up again.
Europe's never-ending troubles continue to dominate the headlines, but there are increasing signs that the so-called BRICs of Brazil, Russia, India and China might be slowing down now. Let's consider them in turn.
China is something of a black box. A Rorschach test, if you will. Its official statistics are suspect and its shadow banking system could hardly be more opaque. But it's kept up its gangbusters growth since 2008. Until now -- maybe. Here's the basic story. When the financial crisis hit the West, China responded with a massive credit-fueled stimulus to replace lost demand. It worked. But it also worked in a way officials didn't want: It fueled a frothy property market. Wary of an incipient bubble, Chinese policymakers decided to pop it last fall. This almost never works.
It's a problem that sounds all-too-familiar to us now. The problem is underwater borrowers. When we talk about popping a bubble, we're talking about increasing interest rates or reserve requirements. The idea is that policymakers can undo these things later to engineer a "soft landing". But a real estate bubble is special because real estate is also collateral. If the bubble does pop, then borrowers likely won't want to borrow more -- even at lower interest rates. Too many will be underwater on what they owe. The soft landing turns hard. Something like this might be happening now. It's enough that there are already whispers of additional stimulus.
India's problems are less clear cut. Its growth has decelerated quite a bit since mid-to-late 2011. Exactly why isn't obvious. Economist Tyler Cowen highlights a number of supply-side issues: an inefficient public sector and legal system along with too little infrastructure. Whatever the case, India is caught in something of a stagflationary trap: Inflation has run into the double digits as real growth has stalled.
Brazil isn't too different. It enjoyed a substantial credit boom before booming prices got policymakers to step on the brakes. But hiking interest rates created new problems. The high yields and still strong growth were quite attractive for foreign capital that kept pouring in. The Brazilian currency, the real, soared to uncompetitive levels. That's been bad news. As Evan Soltas points out, the Brazilian stock market has fallen 25 percent since March. That's a flashing red light screaming recession. But with private debt levels so high, it won't be easy for policymakers to turn things around quickly just by loosening credit.
Russia is doing comparatively well. The IMF projects growth will come in around 4 percent this year. Its problem is that the other BRICs have problems. As the world's biggest energy exporter, Russia depends on strong global demand. If the other BRICs slow down, so will Russia.
In 2008, the developing world carried the developed world through the crisis. In 2012, the developed world isn't ready to carry the developing world if they have their own crisis. A shallow recession is probably the best-case scenario in Europe as it continues to flirt with disaster. And growth is still slow in the U.S., with another summer doldrums looking all too possible. Who will save us this time if things get bad?