The BRICs will dominate the world economy and are decoupled from the western economies, or so is the general expectation, however, we have already dismissed the notion of Russia belonging in the same category as the other three.
With China seemingly in danger of creating the next stock and property market bubbles, we fear for Brazil as well.
There are significant signs that the enormous stimulus package in China is feeding the world's next bubble. The government has been pushing banks to extend new financing to households and businesses in order to support a quick recovery of the economy.
However, according to a government senior economist, some 30 percent of the newly extended loans went straight into the housing market, with 20 percent going to the Chinese stock exchange. In that light, it is not surprising to see the Shanghai Index shooting up as it has in the past couple of months, almost doubling between 1 January and 6 August (date of writing).
Brazil's stock exchange (IBOVESPA) has followed a similar, but less spectacular, path with an increase of a little over 50 percent in the same period. However, the increase in Brazil's stock exchange was not instigated by high levels of credit growth. In fact, credit growth in Brazil will be limited to an expected 8 percent this year. There are, however, two other main causes for the rise in IBOVESPA. The first is the rapid economic recovery of Brazil which has surprised many investors. In fact, investors see Brazil as the second most attractive country after China.
The second reason for the rise in IBOVESPA is the renewed demand for commodities. Brazil is the world's premiere (soft)commodity exporter, and with higher demand and accompanying higher prices, the country is first in line to profit. As commodity-related companies represent 45 percent of the stock exchange, a rally is the obvious effect any time commodity prices go up.
This logic also holds a weakness for Brazil, and the link to China. China's stimulus package has not only lifted its own housing market and stock exchange, but has also led to higher demand for commodities. As explained, this causes the Brazilian stock exchange to perform strongly. Should the Chinese bubble therefore burst, the Brazilian recovery will also be in trouble. Currently, the BRICs may seem stronger than the traditional western economic powers, but they could still suffer from the same illnesses.
The Economic Research Department (ERD) is the economic knowledge center of Rabobank. ERD is responsible for following, analysing and predicting financial and economic developments in the Netherlands and around the world. This article was written by Erwin Blaauw, Economist – South America and Jeroen van IJzerloo,
Senior economist – China and Central America.Rabobank is commited to its environment and the food and agri business, so keep an eye on our website for more interesting articles from Rabobank Group.www.rabobank.com