The term BRICs (encompassing Brazil, Russia, India and China) was coined more to group together those large emerging economies that would see strong growth, rather than because there was much else binding them together. This is in part illustrated by the surprise rate cuts in Brazil, coming at a time when China is still doing its best to tighten policy. But are there any wider inferences to be made?
The move itself was surprising because it comes after Brazil’s central bank increased interest rates at every meeting this year, largely owing to the upward move of inflation to a 6-year high of just below 7% (the target for next year is 4.5%). It’s pretty unusual for a central bank to make such an about turn, only if there has been a catastrophic change in the economic outlook in the intervening period. There are signs that this could have been politically motivated, if only partially. It was just days ago that the government announced a package of spending cuts and hinted that this would leave more policy options open. As such, there is fairly well-founded speculation that the central bank yielded to the political pressure of recent days.
As such, it’s not wise to draw too many conclusions about the significance of this move in relation to the other BRICs, especially with China still doing all it can to tighten policy to keep inflation under control. The more common theme is that it displays the desire of emerging nations to be able to effectively de-couple from the storms that are currently buffeting developed markets. This was achieved fairly well during the credit crisis, with the aggregate emerging market position of strong current account surpluses and strong foreign exchange holdings (although Brazil is not the strongest on both fronts out of the BRIC nations).
BRIC nations have done very well during the post-credit crisis era. Whilst the G7 has been burdened by rising public debt and (for the most part) persistently high unemployment, the emerging nations managed to power ahead. Whilst the G7 is still 1% below its pre-crisis peak in output (looking at World Bank $-based GDP data), BRIC nations are some 24% higher. Furthermore, their plans for becoming even less dependent on the fortunes of the West, whilst credible, will mostly take years to come to fruition. China would certainly like to see higher levels of household consumptions, but with less than half of the population urbanised and health/social security systems still lacking, this will remain a dream for many years to come.
In the meantime, many emerging nations are going to use the available policy options to mitigate the impact of the slowdown in industrialised nations. Compared to 2008, the policy options in terms of both fiscal and monetary policy are far greater for emerging vs. developed markets and are likely to ensure that the de-coupling that has characterised the past three years continues.