14/03/2013

By Michael Baxter, economics writer

Brazil Russia, India, China, and now there is a new member — South Africa. The BRICs have become the BRICS. Their rise is seemingly unstoppable. That is good news or bad news, depending on your own particular view point.

Personally I think the fact that so many billions of people are seeing their living standards rise should be celebrated. As for UK plc, this is a massive export opportunity.

There is a snag however.

There are reasons to think the growth miracle that has been the BRICS has not much longer to run. Now I am not saying it’s curtains, or that it’s just bad news here on in for these countries. I am sure they will do okay. But the heady growth of the last few years will soon become a memory.

Take China. The model that has propelled it over the last few years is breaking. It can’t rely on ever growing exports because the rest of the world is simply not big enough. It can’t rely on investment, because you can have too much of that, and bubbles are made when money is just thrown at projects willy nilly.

China needs its consumers to spend more and save less. And getting them to do that is easier said than done. China also has a demographic crisis in the making.

Later this decade it will run out of workers to migrate from the country to the cities. The policy of one child per family has created all kinds of problems for the future, amongst these is the fact that that the ratio of males to females in China is too high. In the 1908s, Japan seemed to be on an inexorable course for economic domination. The factors that stopped this from occurring are not dissimilar to those that are about to hit China.

I still think China will be the largest economy in the world within a decade or two, but it is going to get there more slowly than we thought and, once there, growth will slow even more. As for GDP per head, there is no sign of this approaching the levels we enjoy in the West for a very long time indeed.

For Russia and Brazil the problems are not dissimilar. Brazil relies on consumers who are becoming worryingly indebted and the export of commodities. Russia is a two horse economy — oil and gas. It may well lose out to the shale gas revolution, assuming you believe shale gas is not overhyped that is.

Both countries need more manufacturing. They both moan about so called currency wars, and say other countries are unfairly pushing down their currencies. But both countries have an inflation problem. A falling Brazilian real or Russian ruble may make this worse.

Where they differ most markedly is with demographics. Russia’s population is ageing fast. Brazil’s baby boomer population is set to enter the workforce. If Brazil will ever have an ageing problem, it is some time off.

Finally, there is India. Growth has fallen dramatically over the last year or so, and the big impediment is regulation and red tape. Some of the rules have been softened; for example, relating to foreign retailers owing single brand stores in India, and foreign direct investment. But India needs to go further. Its opportunity, however, is outstanding.

But while the BRICs have their problems, the economies once known as the tiger countries are looking interesting. So that is the likes of Indonesia, Malaysia and Singapore — the so called ASEAN economies.

One interesting development with these countries has been soaring internal savings rates. High savings can be good or bad, it depends. During the 1990s South East Asia became reliant on foreign capital, and when interest rates rose in the West, money poured out. This left the region in crisis, and the IMF riding in to provide the region with money, but with hugely unpopular conditions attached to it.

That lesson has been learned. A new investment boom is underway, but this time funded by local money.

Watch the region very closely.