Merrill Lynch launches Bric indicator

According to the new BRICycle, India offers the greatest long-run promise while China has the best prospects for a consumption boom.
Stock markets in Brazil, Russia, India and China (Bric) are slowing down and in order to monitor this cycle as it unfolds, Merrill Lynch has launched a propriety indicator called BRICycle.

The BRICycle shows that the four markets are still in a mid-cycle slowdown, not a recession, and that the global credit crunch affects India and Russia more. Driven by different factors in each country (primarily domestic tightening in Brazil and China, and external factors in Russia and India), real GDP growth in Bric is expected to downshift by 210 basis points in 2009 from 2007. The sharpest slowdown is forecasted in China, the shallowest in India.

ôThe Bric walls are about to be hit by the effects of the credit crunch,ö Merrill Lynch says in a report. ôThe outlook for exports is terrible and for credit growth is cloudy. Yet emerging markets have some tricks up their sleeves and can help stabilise the global economy.ö

There are two main ways that the global financial crisis can significantly affect the Bric markets, according to Merrill Lynch. First, by hurting exports to the developed world. US consumption growth in the third quarter has collapsed, likely registering the weakest reading since 1991. China has the most to lose in that regard; Brazil, India and Russia are not that export-dependent. Second, by making external financing more difficult to secure. Brazil and China are better positioned than India and Russia. India has a greater dependence on capital inflows; Russia has a less developed banking sector facing a liquidity squeeze.

However, Bric countries also have the tools to counteract these effects.

Bric consumption alone contributed 110 basis points to global growth this year, against 20 basis points from US consumption. There is a lot more to come, Merrill Lynch says. After all, wage growth remains high, consumers underleveraged and policies supportive, the global economy is intensifying its process of rebalancing. Around 78% of global growth is now coming from emerging markets, rising to 88% next year.

The Bric markets remain net savers and have built up $3 trillion in reserves for a rainy day, Merrill Lynch says. That rainy day has now arrived, and Merrill Lynch expects these nest eggs to be utilised aggressively.

According to the BRICycle, Brazil is the most organic story, Russia is the least. Brazil features a sound macro policy setup, proactive monetary policy, and its growth has not been the main beneficiary of an external bonanza. Russia, in contrast, is rich in natural resources, but faces unfavourable conditions for economic development, an increase in the stateÆs presence, the risk of Dutch disease, and a serious long-term demographic problem.

Also according to the BRICycle, India offers the greatest long-run promise while China has the best prospects for a consumption boom. India is the poorest of the Bric countries, with the greatest consumer penetration potential, a demographic dividend and yet-to-come urbanisation. China has the highest savings rate, the lowest interest rates, the highest investment rate and the highest potential growth rate. An authoritative government means counter-cyclical policies can be effective. All of this implies the best prospects for a consumption boom in the coming years.

Merrill Lynch considers population, growth, inflation, monetary policy, fiscal policy, central bank reserves, the exchange rate, money supply, the role of commodities, current accounts, and politics when determining the BRICycle.
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