Report: Euro-zone crisis largely to blame for economic slowdown in BRIC economies

Brazil, Russia, India and China, the cluster of emerging countries known for their rapid growth in recent years, are losing some lustre.

After about a decade of outpacing advanced economies, Brazil, China and India have seen economic growth slow in the past 18 months. The International Monetary Fund projected 2012 GDP to rise 2.5% in Brazil (down from 7.5% in 2010); 6.1% in India (down from 10.8% in 2010); and 8% in China (down from 10.4% in 2010). Russia’s GDP increase is expected to dip to 4% (down from 4.3% in 2010).

Deloitte’s most recent global economic outlook blames this slowdown mostly on the debt crisis in the euro zone but also on domestic challenges in some of the BRICs, as the four countries are called.

“Each time the euro zone starts to seem more stable, the crisis rears its ugly head again,” Ira Kalish, director of global economics at Deloitte Research, said in the report. “The result is downward movement of European economic activity and increased uncertainty. Both of these factors, in turn, have a negative impact on growth everywhere else.”

Unemployment in the entire euro zone climbed to 11.3% in July, according to Eurostat, and above 20% in Spain and Greece, two of the struggling euro-zone members. In August, confidence in the economy, a measurement that includes indicators from industry, services and consumers, fell 1.8 points to 86.1 in the euro zone, with 100 being the threshold between a negative and a positive outlook, according to the European Commission.

Brazil, Russia, India and China, which are among Europe’s top ten trade partners, are experiencing the fallout of a deepening crisis that, particularly in Europe, is staunching demand for goods made in BRIC economies.

The uncertainty resulting from the deepening euro-zone crisis has triggered a flight of capital, according to Deloitte. Investors looking for safety have instead put their money to work in perceived safe havens such as the US, Japan, Switzerland and the UK.

Home-grown factors in the BRICs are also at play in the economic slowdown, and Deloitte warns they could pose longer-term risks:

• Historically low interest rates spurred consumer borrowing in Brazil, and now consumers increasingly are defaulting on their loans, especially automobile loans. But the Brazilian banking system is believed to be robust, the government’s finances are in reasonably good shape, and the 2014 World Cup and the 2016 Olympic Games are expected to boost the nation’s economic growth.

• In Russia, strong domestic consumer spending and elevated oil prices made up for slowing demand from Europe and China during the first quarter of 2012. But as oil prices decline, economic growth and government infrastructure investments are expected to slow.

• The Indian economy is hurting not only from a lower demand for Indian goods abroad but also from a dearth of market-friendly economic policies and bureaucratic reluctance to make key decisions. Poor growth in the agricultural sector is putting less money into the hands of rural Indians, who contribute significantly to domestic consumption and GDP growth. And high inflation is raising borrowing costs.

• In addition to the euro-zone crisis, the lagging effect of last year’s monetary policy tightening is weighing on the Chinese economy. Housing investment has declined, and regulators are concerned about the growing number of bad assets held by banks. Local governments are among the borrowers having difficulty servicing their loans.

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.