Jim O’Neill, Head of Global Economic Research for Goldman Sachs, is not ready to declare decoupling dead – at least with regard to the BRICs. O’Neill, the ‘inventor’ of the BRICs, recently sought to resuscitate the notion that the BRICs can continue to grow even after their largest export market, the US, succumbs to the Great Recession, because they rely on domestic demand. The piece is entitled “The New Shopping Superpower: The BRICs rely increasingly on domestic demand and can boom even if export markets like the US slow,” and was published in NEWSWEEK (March 21, 2009 in the published magazine, March 30, 2009 issue). Indeed, Jim not only defends decoupling, he has revised his estimate of when he believes the BRICs, collectively, will outgrow, in dollar terms, the G7. Earlier predictions by Jim argued the BRICs would collectively have a larger economy in 2035. Now Jim, with an examination of current rates, predicts that the shift could occur as early as 2027.
Though Jim recognizes that, collectively, the BRICs are likely to grow at only 4 percent, predictions for the global economy are a decline of 1.1 percent. Individual developed states are in much more difficult shape, with Goldman Sachs’s predictions for the US down 3.2 percent, worse for the Euro zone and a dizzying 6.1 percent decline for Japan.
Meanwhile China is predicted to grow at 7 percent this year and over 8 percent in 2010 and India at 6.6 for the same year. As O’Neill concludes:
“Within the overall picture, there is clear evidence of major rebalancing, as BRIC shoppers account for an increasingly large share of global consumption. When we track retail shoppers from 2004 to 2008 (using data adjusted for inflation and the relative size of national economies), it becomes clear that European and Japanese shoppers are barely contributing anything to real consumption growth. American shoppers gradually contributed less up to 2007 before completely zipping up their wallets in 2008. BRIC shoppers slowly contributed more, and, importantly, their contribution continued to increase into 2008, despite the collapse of the US shopper.”
Jim looks to better growth for China on the basis that China’s retail sales grew by 15 per cent in February. Consumer prices have declined sharply providing a boost to real income for Chinese consumers. Jim also notes that the government has announced plans to strengthen medical coverage that he, and I’m sure the government, hopes will help release the savings of the public. And then there is infrastructure spending, etc., etc., ending with the current stock market rally. Notwithstanding the lowering of current growth predictions, Jim remains optimistic over China’s growth prospects.
And he may be right, though the cascading implications of the global financial crisis and its impact on trade, investment and jobs should not be underestimated. For instance, I note that Brazil’s economy – another of the BRIC economies – is now suffering. A recent article in the New York Times (“Brazil’s ‘Teflon’ Leader Nicked by Slump,” by Alexei Barrionuevo, dated April 3, 2009) suggests the real economy is now “hurting”. Brazil’s GDP has fallen 3.6 percent in the last quarter of 2008 from the third, and the country lost 654,946 jobs in December 2008, with 101,748 more lost jobs in January.
I would continue to hold all bets on decoupling for the moment.