DNBulletin: Slower growth in BRICs unlikely to hamper euro area’s recovery
|Date||5 December 2013|
In the years immediately following the outbreak of the credit crisis, in particular, high growth in the four main emerging economies, namely Brazil, Russia, India and China (BRIC), was a key factor supporting world trade. However, the past year has seen several downward adjustments of the outlook for the BRIC countries. An analysis by De Nederlandsche Bank suggests that downward adjustment of the growth outlook for the BRIC countries is unlikely to hamper the euro area’s recovery.
In recent years, exports to the BRIC countries have made a significant contribution to real export growth in the euro area. However, the importance of exports to BRIC countries varies from country to country. Exports to BRIC countries made the greatest contribution to total export growth in Germany, while their contribution was relatively modest in, for example, Spain. In part, this is a reflection of the relative openness of their economies and the nature of their exports. For example, Germany specialises in capital goods and cars, which are in great demand in the BRIC countries. For the euro area as a whole, exports to China and Russia are particularly important.
In the past six months, uncertainty about the growth outlook for the BRIC countries and other emerging economies has increased and growth forecasts have been adjusted downwards on several occasions, sometimes even by multiple percentage points. For instance, in April, the IMF still projected 5.7% GDP growth for India, before lowering its projection to only 3.8% in October. The European Commission has also adjusted its growth expectations for the emerging economies downwards relative to its spring forecasts, owing to both cyclical and more structural factors. Cyclical factors include worse-than-expected external demand from the euro area, weak domestic investment (Russia), and lower consumption and tighter monetary conditions (India and Brazil).
Structural factors include, for example, increasing challenges faced by emerging economies in maintaining their catch-up pace. More specifically, China is rebalancing its growth to a more sustainable, yet lower rate, with growth being increasingly driven by consumption rather than buoyant investment and credit growth. Beyond that, the U.S. Federal Reserve may taper its bond purchases, representing an extra challenge for these countries, which attracted a large inflow of capital in the past years. A sudden reversal of such capital flows can result in tighter financial conditions, in particular in countries with a high dependency on external financing (mainly India and Brazil).
Better-than-expected impact on euro area The importance of the BRIC countries for the euro area raises the question as to the impact of these downward growth forecast adjustments on the outlook for the euro area. Therefore, this involves an effect that is already included in the current estimates. A simulation using the NiGEM model provides a better understanding of the above impact. We have used this simulation to calculate the impact on GDP growth in the euro area of the downward adjustments of domestic expenditure growth since the publication of the IMF’s World Economic Outlook in April 2013 (see Table for these adjustments).
The simulation shows the negative impact on the euro area’s economy to be less severe than expected, with an impact on euro area GDP growth of minus 0.1 percentage point for 2013, and minus 0.2 percentage points for 2014 and 2015. The effects for the individual countries are broadly comparable, though the simulation reveals a slightly greater impact on small, open economies such as the Netherlands. Overall, it appears that the downward adjustment of the growth outlook for the BRIC countries will not hamper the euro area’s recovery.