The Hindu Business Line : Global economy will be built by BRICs

OVER a year ago, the Goldman Sachs Economic Research Group took a look at how the world might change between now and 2050 if the BRICs (Brazil, Russia, India and China) continued to grow. The thesis underlying the exercise was that every few decades, a seismic shift occurs in the world economy that has far-reaching implications across a wide range of markets: The rise of the US economy in the late 19th century, the post-War rebuilding of Japan and Western Europe and the rise of the East Asian production network, for instance. The punch-line of that report was simple: The importance of the BRICs — as a source of new demand and as a share of global spending — could increase sharply over the next few decades. As a result, the world might look very different than it does today and sooner than most people expected.

In its third BRICs report, the Goldman Sachs Economic Research Group has taken a closer look at the impact on the world economy if the BRICs dream becomes a reality and has demonstrated what its BRICs projections would mean for the world growth outlook and what they imply for the emergence of a middle-class in the BRICs countries. In specific, it has examined in detail what the BRICs growth story would mean for three big areas of market development: energy and oil (as the world's most important commodity); cars (as a major consumer durable) and the level of equity market capitalisation (as a proxy for the size of capital markets). The report says that "Between them, these three different markets — crude, cars and capital — give a good snapshot for the kinds of opportunities and pressures that could be associated with the BRICs dream."

These new projections again paint a striking picture. Continued growth in the BRICs would push up trend growth for the world in the near-term and could see a rapid expansion in the middle-class in these four countries. The appetite for energy and commodities, where the BRICs have been most visible so far, is likely to stay strong with the peak pressures probably felt over the next decade. The BRICs presence could also soon begin to be felt more in areas — consumer durables and capital markets — where they have so far been a smaller force. In fact, in each of the energy, autos and capital markets, the BRICs have the potential to be a major source of growth within ten years and perhaps a dominant one within twenty.

"Although our earlier report mapped the path of the BRICs out to 2050, our new projections suggest that their importance to global markets could rise much sooner, as they move through the sweet spot of their growth and development path. They also point to the BRICs' rise as a potentially transforming event for the world economy, with deep and pervasive impacts. How policymakers, companies and investors cope with the opportunities and challenges that arise from these shifts is likely to become increasingly important."

The Goldman Sachs Economic Research Group points out that, over the next few years, BRICs development (and in particular continued industrialisation in China and India) could push the trend world growth rate above four per cent.

World growth trends could remain above the average of the last 20 years (3.7 per cent) for around a decade, though after that global demographic pressures are likely to lead to a gradual decline.

If reforms either in Europe, Japan or in the BRICs themselves raised overall productivity growth rates, or if demographic pressures led to longer working lives, world growth could move higher than 4 per cent in the short term and stay higher for longer.

The BRICs' share of world growth could rise from roughly 20 per cent in 2003 to more than 40 per cent in 2025. Their weight in the world economy could rise from less than 10 per cent now to more than 20 per cent in 20 years' time.

The BRICs impact on global markets is likely to follow a sequence. Commodity markets are already the clearest pressure point for BRICs growth and their impact on those markets is likely to be at its peak in the next decade.

The importance of the BRICs as consumer markets is likely to be the next phase and could be a major story in the next ten years. The importance of the BRICs to capital markets is likely to lag a little further behind that and to build gradually over the next twenty years.

Underlying global demand growth for energy and oil could remain very strong (well over two per cent annually) over the next 15 years or so as China's industrialisation continues and India's follows behind, suggesting pricing pressure could persist for some time. After this period, the trend should decline gradually, as more economies move to a phase of lower demand growth. The BRICs could continue to increase their already substantial contribution to global oil demand growth.

China's contribution should remain high but is likely to peak in 5-10 years time and should decline steadily thereafter. India's impact will become gradually more important. In less than 15 years, India's contribution to global demand growth could overtake China's.

China's share of actual oil demand (as opposed to growth) may rise from 8-9 per cent currently to a peak of around 16.5 per cent in 25 years time, while India's share could nearly double and will gradually converge on China's.

As for the BRICs and the global autos markets, the report says that China is rapidly approaching the likely sweet spot for growth in autos ownership. Car ownership could increase nearly threefold in the next decade, though growth rates are likely to peak in the next few years.

India's autos growth will also rapid, with the potential for a three-fold increase in car ownership over the next ten years. However, the best decade for India's growth is probably about ten years behind China's, beginning in around 2015. In fact, China and India may emerge as the world's No 1 and 2 largest car markets. Within 20 years, China could overtake the US as the world's largest auto market, with India displacing the US perhaps as soon as 15 years later.

With regard to the BRICs and global capital markets, the report predicts that the BRICs' importance to global equity markets would rise from a paltry 3.5 per cent currently to around 10 per cent by 2020, depending on the extent of capital market development.

"If they choose a more market-based approach to corporate finance, their share could be as large as 16 per cent. Further, market capitalisation in the BRICs economies could increase over the next decade by a factor of four times to $4 trillion, with a large increase in capital market activity. China and India alone could account for 60 per cent of that total. Despite this rapid growth, BRICs' capital markets are still likely to be dwarfed by the US market for decades — but could come to rival Europe as a group within 15-20 years and could increase the weight of emerging markets in global equity portfolios.

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