BRIC’s fading fortunes a bad sign for global economy

With growth stalled in much of the developed world, hope for the global economy has turned in recent months to key emerging markets, including members of the so-called BRIC countries of Brazil, Russia, India and China – the only developing economies with annual gross domestic products of over $1-trillion. Now, fissures are showing up even there, representing a troubling sign for what was supposed to be a key driver of the global recovery.

Brazil's economy contracted 0.04 per cent in the third quarter, a report showed Tuesday – the country's first quarterly contraction since 2009. Brazil's Finance Minister, Guido Mantega, chopped his 2011 growth forecast for Latin America's largest economy to 3.2 per cent, down from the previous estimate of 3.8 per cent. Momentum is also ebbing in China and India, with Russia representing the lone BRIC exception – although that country is currently mired in political turmoil, and third-quarter growth there failed to meet government forecasts.

While headlines have focused on troubles in advanced economies – particularly Europe's – emerging markets are coping with their own challenges. And although the BRIC countries remain important engines of global activity, their fading fortunes underscore the interconnected nature of the world's economy.

"They're not immune. And there's a tremendous amount of correlation, particularly in stock markets internationally, and that tends to affect the investment climate and consumer confidence," said William Cline, senior fellow at the Washington-based Peterson Institute for International Economics.

Brazil's third-quarter slowdown stems more from domestic factors than external woes, economists noted. Borrowing costs in Brazil are high – the country's key interest rate is 11 per cent, even after three rate cuts since August – and inflation is a still-hot 6.7 per cent. The Brazilian slowdown also comes after monetary and fiscal tightening through the first half of the year, "so it's a lagged response," said Gustavo Rangel, the New York-based chief Brazil economist at ING. "It's very domestic driven, and not contagion from Europe."

Still, the country's growing ties to China could weigh on exports in the coming quarters, as could any drop in commodity prices. Brazil's soft patch could also affect Argentina, which relies on Brazil as a key export destination, Mr. Rangel said.

Other BRIC countries face challenges of their own. India's gross domestic product expanded 6.9 per cent at an annual rate in the third quarter – the slowest pace since the second quarter of 2009 – after the country's central bank raised interest rates to curb inflation, which is growing at the fastest rate of all BRIC countries. Manufacturing, and investment by companies and the government, also slowed in the quarter. While benchmark stock indexes in all BRIC countries have slumped this year, India's has dropped the most, down 18 per cent.

In Russia, GDP picked up in the third quarter, thanks to increased investment by companies and higher bank lending. But the 4.8 per cent rise from the same quarter last year was less than expected by the Russian Economy Ministry, and slower than the annual rate of 6 to 7 per cent that is targeted by Prime Minister Vladimir Putin. Economists predict that Mr. Putin may boost government spending to fuel growth as he seeks to regain the Russian presidency next year.

The BRIC countries sell a lot of their goods to the U.S. and Europe, China in particular. They also sell a lot of goods to each other, meaning that as one country or region flags, the others suffer. "In Brazil's case, they sell a lot of their goods to China," noted Benjamin Reitzes, senior economist at BMO Nesbitt Burns in Toronto. "So you can see the impact there."

But in the long run, Mr. Reitzes is confident that the BRIC countries will continue to lead global growth because of their growing populations and expanding middle class. "One bad quarter is not enough" to throw in the towel on the BRICs, he added.

With a file from Bloomberg News.