In today's Fundamentals briefing, Legal & General Investment Management's (LGIM) Emerging Markets Strategist Brian Coulton examined a stellar decade for the BRIC economies of Brazil, Russia, India and China, and predicted that these will have a large impact over the next decade, albeit in a different way.
"What happens in the BRIC economies is not just a local matter" said Brian, "with the global economy becoming more inter-linked, emerging markets' trends will have a real impact globally. The BRIC economies are the powerhouses of the emerging market universe."
India and China saw the strongest growth over the decade. LGIM's analysis shows that accelerated capital accumulation was a key driver of this growth, largely funded by rising domestic savings rates. Faster population growth also helped as well as improved efficiency as these economies converged towards higher income levels in the west.
"Looking at the past is more than an academic exercise. By identifying the sources of previous growth trends, we can assess whether these will continue into the future" explained Brian. "For instance, by looking at the demographic trends, we can see that the growth in working age population will slow sharply in China, and actually fall in Russia. A key conclusion is that the sharp increases in investment ratios that boosted capital accumulation in the last decade are highly unlikely to be repeated. Both these factors will act as a brake on growth".
Ultimately, while Brian predicted that growth in these economies will slow over the next decade, it will still be very strong compared to that seen in the West. However, the make-up of that growth is set to change.
"Those high levels of investment changed the dynamics of global capital goods and commodities markets significantly. The big change over the next ten years will be a sharp decline in investment growth. In the last decade Chinese and Indian consumers have foregone a rising share of income to fund growth but in the next ten years this pattern is likely to be reversed. If the last decade was the story of BRICs as producers, the next decade will be the story of BRICs as consumers. The effects will be felt across the globe."
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