Jim OÕNeill, chairman of Goldman Sachs Asset Management, pauses during the Retail Week conference in London, U.K., on Wednesday, March 16, 2011. The U.K. economy will be challenging for retailers this year as consumers wrestle with government austerity measures and higher value-added tax, chief executive officers of some of the nation's biggest retailers said today. Photographer: Simon Dawson/Bloomberg *** Local Caption *** Jim OÕNeill

Even Jim O’Neill is asking whether the Brics (Brazil, Russia, India, China and South Africa) need reinforcing 11 years after he coined the term to describe the world’s future powerhouse economies.

O’Neill, the chairman of Goldman Sachs Asset Management, says his thesis that Brazil, Russia, India and China would together increasingly buoy the global economy faces “a more challenging test” as investors dump the countries’ stocks.

China pared its growth target to the lowest since 2004, Standard & Poor’s (S&P) may cut India’s investment grade credit rating, Brazil is on pace to expand less than 3 percent for a second consecutive year and falling oil prices may hurt Russia.

A prolonged slowdown in the four countries poses a fresh threat to a world economy suffering its weakest spell since the end of the 2009 recession, which the Brics helped shorten by contributing about half of the international expansion since 2007.

Leaders attending this week’s Group of 20 (G20) summit in Mexico are already expressing concern.

Rich-nation policymakers “are so wrapped up in their own problems they’re praying some of this weakness is just temporary in the Brics,” O’Neill said. “If it’s not, then it’s pretty worrying.”

While O’Neill is standing by his call that China will remain robust and the Brics will together grow 7 percent this year after 7.5 percent in 2011, economists at Morgan Stanley, Bank of America (BofA) Merrill Lynch and Citigroup are scaling back their forecasts.

Surprise index

In a sign of the economic threats surrounding the Brics, Citigroup’s surprise index, which measures how much data miss predictions, is at minus 81.1 for the group, down from 15.8 three months ago and the weakest of all its gauges.

Investors have moved out of emerging market equity funds for eight of the last 10 weeks and asset managers now have their lowest exposure to such markets since October, a survey by BofA Merrill Lynch found this week. The capital flight is driving down stock prices, with the MSCI Bric index, which tracks the group’s biggest equities, down 25 percent from a year ago.

After China’s growth moderated in the past five quarters and gross domestic product (GDP) rose 8.1 percent in the first three months of the year, consumer prices rose the least in two years in May and manufacturing expanded at the slowest pace in six months. The government is targeting growth of 7.5 percent this year.

India’s 5.3 percent expansion in the first quarter was the weakest in nine years and S&P warns that the country may be downgraded unless growth picks up and political roadblocks to decision-making are overcome.

Brazil’s 0.8 percent growth in the first quarter from the same period a year ago also undershot forecasts even after policymakers cut taxes and interest rates to revive consumer spending.

Although Russia’s economy unexpectedly accelerated in the first quarter, expanding 4.9 percent from a year earlier, the government projects growth of no more than 4 percent in the coming years as output of oil, the nation’s biggest export, stagnates. The price of oil is down about 18 percent this year.

While Europe’s crisis is sapping export demand some of the brakes on growth are homespun.

JPMorgan Chase cited China’s efforts to cool inflation and demand for property, as well as limited lending from Brazilian banks. Its economists expect emerging markets growth of 4.5 percent, down from a previous estimate of 5.2 percent.

Greek elections

G20 leaders start arriving in the resort of Los Cabos today, the same day as parliamentary elections in Greece. With the threat of Greece exiting the euro currency union hanging over the summit, Bric leaders who for years have been seeking a bigger say in how the global economy is run will come under pressure to detail contributions to the International Monetary Fund (IMF).

The lender said in April that it was boosting its financial firewall by $430 billion (R4 trillion).

O’Neill estimates that China last year generated the economic equivalent of Greece every 11½ weeks, while the group contributed about $2.2 trillion, almost the equivalent of Italy’s GDP.

Weakness in China alone has the potential to reinforce woes elsewhere. Brazilian soya beans, iron ore and other commodity exports to China are already on course for the worst performance in a decade.

Caterpillar, the world’s largest maker of construction and mining equipment, in April identified slowing demand and revenues in China and Brazil.

WPP chief executive Martin Sorrell said on Wednesday that the biggest international advertising agency was “increasingly wary” of a slowdown in traditionally high-growth economies.

Europe’s difficulties could also escalate if its countries suffer falling demand from previously strong markets, according to David Lubin, the head of emerging market economics at Citigroup.

Greece, for example, saw an 82 percent increase in shipments to China last year, according to a March report from the Greek Embassy in Beijing. China is Germany’s fifth biggest trading partner, buying e64.8bn (R684.5bn) of its goods last year.

“A country that is potentially insolvent could be tipped into actual insolvency if external demand is weak enough,” Lubin said. “If creditworthiness is partly explained by how strong a country’s export growth is likely to be, then weak Chinese data plays negatively into the market’s confidence about Europe.”

Driving growth

Alberto Ades, the co-head of global economics research at BofA Merrill Lynch, estimates that given their combined size, a 1 percentage point drop in the GDP of emerging markets is the equivalent of a 1.7 point fall in the US. He predicts developing economies will expand 5.3 percent this year, down from a 5.5 percent estimate at the start of the year. “When you think about emerging markets driving growth, what happens to them is pretty significant.”

Policymakers are responding where they can. China last week cut borrowing costs for the first time since 2008, while Brazil’s central bank has signalled it will reduce its benchmark rate for an eighth consecutive time in July after cutting it to a record low 8.5 percent in May.

China may also introduce additional stimulus to protect its growth target, and Indian Prime Minister Manmohan Singh on June 6 outlined initiatives including port projects worth $6.3bn.

O’Neill, who recently published The Growth Map: Economic Opportunity in the BRICs and Beyond, said he was more concerned by Brazil’s weak growth and India’s policy paralysis than he was by China, which he says remains on track to become a more consumer-led economy.

He remains “relatively sanguine” that his world view is intact a decade since he and colleagues at Goldman Sachs predicted that the countries would join the US and Japan as the world’s biggest economies by 2050. – Simon Kennedy

from Bloomberg