Emerging markets

When Jim O’Neill coined the acronym Bric in 2002, he brilliantly identified the main force that would drive global economic growth for the next decade. These four economies – Brazil, Russia, India and China – had little in common, except that they had the scale and growth potential to transform the growth rate of global GDP as never before. For many years, their startling performance was the main manifestation of the phenomenon that became known as “globalisation”.

When the leaders of Brics (which has included South Africa since 2010) met for their annual summit last week, however, they knew that their collective lustre had faded. The bursting of the Chinese equity bubble, following the hard landing in the real estate sector, now looms as a major downside risk for global financial markets and world economic growth. Brazil and Russia have been mired in deep recessions, taking the aggregate Brics growth rate down to only about 2 per cent in April, according to Fulcrum’s “nowcast” activity models. Although these models have identified a pick-up in recent weeks, growth in the Brics remains well below its (falling) long-term trend rate, and Markit reports that manufacturing business surveys in the emerging economies fell in June to the lowest readings since the financial crash in 2009.

Since 2010, the long run underlying growth rate of the Brics has slowed from 8 per cent to 6 per cent. This is not surprising in view of the pronounced tendency for economies to revert to their mean long-run growth rates over time. But the actual growth rate has dropped even more sharply, from 11 per cent to 5 per cent. A cyclical downturn has been built on top of a secular one.

What had once been the brightest spark in the global economy has now become its big headache. What went wrong with the Brics and can they recover? Read more

The leading central banks in the developed economies have, of course, been the main actors underpinning the global bull market in risk assets since 2009. For long periods their stance has been unequivocally dovish as they have deliberately tried to strengthen an anaemic global economic recovery by boosting asset prices.

In the past week, we have had major statements of intent from Janet Yellen, the new US Federal Reserve chairwoman; from the European Central Bank; and from the Bank of England. After multiple hours of fuzzy guidance about forward guidance, the clarity of previous years about the global policy stance has become much more murky. Central banks are no longer as obviously friendly to risk assets as they once were – but they have not become outright enemies, and they are unlikely to do so while they are concerned that price and wage inflation will remain too low for a protracted period.

It is now quite difficult to generalise about what central bankers think. However, a few of the necessary pieces of the jigsaw puzzle slotted into place in the past week. Read more

In this regular series of weekend blogs on the major events in the world of global macro, the last blog of the month will reflect on the main themes of the whole month, not just the latest week. Read more