Talking Economics: Bother in the BRICS
There were limited growth changes made to our emerging markets forecast, but all of the BRIC members face challenges this year, with sentiment on India beginning to turn.
Russia: unwarranted optimism
As a result of better-than-expected first quarter GDP growth of -1.9% year-on-year, we have revised our year-end growth estimate up slightly, but still expect a 4% contraction.
Two key risks persist:
- The oil price (which remains unlikely to return to its 2014 average this year)
- The Ukraine situation (which remains tense).
On the monetary policy front, the central bank has embarked on an interest rate cutting cycle which we expect to take rates to 10% by end-2015, given growing economic weakness and the expected peaking of inflation.
As a small positive for Russia, rouble strength in recent weeks has enabled the central bank to begin rebuilding reserves following months of heavy outflows.
Brazil: Dilma spiralling down
Continued economic weakness, combined with other disappointments, has prompted us to revise down our growth forecast to -1.8% in 2015.
However, we have upgraded our inflation forecast to just shy of 8% in 2015, although this is partly driven by one-off factors.
Once these fade, we expect inflation to ease in 2016. In fact, we see it being sufficiently low in the first quarter of 2016 as to allow the central bank to preemptively reduce interest rates by 50bps in the fourth quarter.
However, if there is a "taper tantrum" repeat in response to the Fed’s expected rate hike, a Brazilian rate cut looks much less likely.
India: sentiment sours
The modest pace of reform implemented since Narendra Modi’s electoral victory last year has been largely in line with our expectations.
Consequently, we do not yet revise our growth forecasts, though failure to deliver some reform in the next session of parliament would present downside risks.
On inflation, we have revised down our forecast for this year driven in large part by lower food price inflation, although the risk of an El Nino event means inflation could surprise to the upside.
We expect two more interest rate cuts this year given the low inflation, taking the policy rate to 7%, but no more than that given the desire to hit an inflation target of 4% in the medium term.
China: stimulus accelerates
The growth outlook for China this year and next is unchanged at 6.8% and 6.5%, respectively. In response to weak growth, authorities have stepped up monetary policy easing measures.
However, we have also seen some backpedalling on fiscal reform recently, and regulations compelling banks to lend to local governments to help fund infrastructure projects.
The combination of easing and regulation seems designed to force banks to finance fiscal stimulus, with some help from the central bank.
For this reason, we do not upgrade our growth expectations despite the more aggressive stimulus; it is merely allowing our original base case to play out.