Up against a BRIC wall

Faltering expansion in the world's star economies is compounding European woes, and could be leading up to the disappearance of one of the last engines of global growth.

Although investors continue to fret over the worsening situation in Europe, there are growing signs that the big emerging economies could also be headed for trouble.

After a decade of stellar growth, the BRICs (a term coined by Goldman Sachs’ Jim O’Neill in 2001 for the star emerging economies – Brazil, Russia, India and China) are now seeing their growth rates slowing sharply. And this will cast a major cloud over the global outlook, as the BRICs now account for 40 per cent of world economic growth.

Indian manufacturing activity has slowed down in recent months, as producers grapple with fewer orders, and longer delivery times caused by electricity cuts. At the same time, rising inflation has pushed up the cost of raw materials.

Chinese economic activity is also slowing rapidly, reflecting sluggish domestic demand and a sharp drop in exports. Demand for Chinese exports is likely to falter even further as Europe slips deeper into recession.

And Brazil’s economy has also slowed sharply. After an excellent year in 2010, where the country notched up a growth rate of more than 7 per cent, activity has slowed markedly. The country is unlikely to record a growth rate of more than 3.5 per cent next year.

The weaker outlook for growth is already being reflected in the share markets of the BRICs, which are either in bear markets or brushing dangerously close. Both India’s sharemarket and its currency have been tumbling, with the rupee hitting a record low against the US dollar on Wednesday. China’s sharemarket has also broken through the 2,300 level that marked its low point in 2010.

The slowdown in the BRICs comes at a time when most developed countries are embracing fiscal austerity as they battle with swollen budget deficits and mountainous debt levels. At the same time, central banks in the developed countries are already running extremely loose monetary policies, and have run out of options for providing further monetary stimulus.

The slowdown in the BRIC economies means that we could be on the brink of seeing one of the last sources of global economic growth disappear.

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