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Brics decade-doc Brics decade-doc Document Transcript

  • BRICs MonthlyIssue No: 10/03May 20, 2010Goldman Sachs Global Economics, Commodities and Strategy Research at https://360.gs.com Is this the ‘BRICs Decade’? The last decade saw the BRICs make their mark on the global economic landscape. OverDominic Wilson the past 10 years they have contributed over a third of world GDP growth and grown fromdominic.wilson@gs.com+1 212 902 5924 one-sixth of the world economy to almost a quarter (in PPP terms). Looking forward to the coming decade, we expect this trend to continue and become even more pronounced.Alex L. Kelstonalex.kelston@gs.com The last decade saw the ‘arrival’ of the BRICs+1 212 855 0684 story. Here, we take a look at the next % global BRICs Will Contribute Twice As Much To growth Global Growth As The G3 In The Next Decade chapter—at how the BRICs and their 50Swarnali Ahmed relationships with the rest of the world will 45 2001-2010swarnali.ahmed@gs.com+44 (0)20 7051 4009 change in their second decade. We expect 40 2011-2020 many of the trends we have already seen to 35 continue and become even more pronounced. 30 Our baseline projections envisage the BRICs, 25 as an aggregate, overtaking the US by 2018. In 20 terms of size, Brazil’s economy will be larger 15 than Italy’s by 2020; India and Russia will 10 individually be larger than Spain, Canada or 5 Italy. 0 China Russia India Brazil BRICs G3 In the coming decade, the more striking story Source: GS Global ECS Research will be the rise of the new BRICs middle class. In the last decade alone, the number of people with incomes greater than $6,000 and less than Millions of people Millions in the BRICs to Enter Middle Class $30,000 has grown by hundreds of millions, Income Bracket by 2020, Far Surpassing the G7 and this number is set to rise even further in 1800 the next 10 years. These trends imply an 1600 2000 acceleration in demand potential that will 1400 2010 affect the types of products the BRICs 1200 2020 1000 import—the import share of low value added 800 People with incomes greater goods is likely to fall and imports of high than $6,000* 600 value added goods, such as cars, office 400 equipment and technology, will rise. 200 0 In the past decade, BRIC equity markets Brazil Russia India China BRICs G7 outperformed significantly because the strong *We generally consider Middle Class as those with incomes >$6,000 and <$30,000. But, to compare BRICs to the G7, we included estimates for all growth of these economies surprised many and people >$6,000 - i.e. both the middle and upper class. Source: Goldman Sachs the BRICs themselves came into focus. At the same time, valuations were low relative to many major markets in 2000. Now that the BRICs story is better known, expectations are higher and the valuation gap is much smaller, the same degree of outperformance seems much less likely, even if the BRICs deliver solid returns. Important disclosures appear at the back of this document
  • Goldman Sachs Global Economics, Commodities and Strategy Research BRICs Monthly2010US$trn BRICs GDP Will Continue To Gain On The G7 The ‘BRICs’ Decade’—Behind Us or Ahead? 40 Since we coined the acronym in 2001, BRICs has become 35 2000 well-known worldwide, and investors, politicians and many 2010 30 2020 others have shifted their focus to these countries. As we look 25 back on the last decade, it’s clear that the BRICs have already begun to play a more significant role in the global 20 economy and on the world political stage. The BRICs 15 contributed 36.3% of world GDP growth in PPP terms (or 10 27.8% in USD) during the first decade of the century. They have also steadily increased their share of global output. 5 Currently, they make up about a quarter of the global 0 economy (in PPP). G7 BRIC N-11 Other Other Developed Emerging Markets Markets We expect many of the trends we have already seen to Source: GS Global ECS Research continue over the coming 10 years and become even more% global BRICs Will Contribute Twice As Much Togrowth Global Growth As The G3 In The Next Decade pronounced. Our baseline projections, underpinned by 50 demographics, a process of capital accumulation and a 45 2001-2010 process of productivity catch-up, envisage that the BRICs, as 40 2011-2020 an aggregate, will overtake the US by 2018. In terms of the 35 size of the economy, by 2020, Brazil will be larger than Italy; and India and Russia will be individually larger than 30 Spain, Canada or Italy. By 2020, we expect the BRICs to 25 account for a third of the global economy (in PPP terms) and 20 contribute about 49.0% of global GDP growth. 15 10 5 0 Will This Be The Decade of the New Middle Class? China Russia India Brazil BRICs G3 Although the BRICs’ growth story developed in the last Source: GS Global ECS Research decade, one of the major effects of their growth is likely to Millions of people The Expanding World Middle Class play out over the next decade. That is, rising incomes in the4,500 BRICs will create a massive new middle class, as we first4,000 People with Incomes between 2008 detailed in Global Economics Paper 170: “The Expanding $6,000 and $30,000 Middle: The Exploding World Middle Class and Falling3,500 World Global Inequality”. We have already seen falling poverty3,000 rates and rising income equality over the last decade, and World ex China and2,500 India these trends are set to continue.2,000 China  fact, the middle class as we define it (people with incomes In1,500 India greater than $6,000 and less than $30,000) has already grown1,000 by hundreds of millions in the last decade alone, and is set to 500 grow even more in the coming decade. Growth in the middle 0 class will be led by China, where we expect the number of 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 people entering the middle class to peak during this decade.Source: Goldman Sachs Meanwhile, middle class growth in India will accelerateMillionsof people Millions in the BRICs to Enter Middle Class throughout this decade. As China and India are the world’s Income Bracket by 2020, Far Surpassing the G7 two most populous countries, rising incomes there will have1800 much greater impact on global demand than any other1600 2000 countries could.1400 20101200 2020 The other BRICs (and other emerging markets) will also see1000 a rising middle class in the next decade, and should also see 800 People with incomes greater a rising ‘upper class’ (incomes higher than $30,000). than $6,000* 600 400 With the explosion of the middle classes, spending patterns 200 are likely to change (see next section), leading to competition 0 for resources. Environmental pressures may become even Brazil Russia India China BRICs G7 more acute, as the demand for energy increases. We have*We generally consider Middle Class as those with incomes >$6,000 and already seen many of these effects begin to take shape, and<$30,000. But, to compare BRICs to the G7, we included estimates for allpeople >$6,000 - i.e. both the middle and upper class. we expect these patterns to intensify as the decadeSource: Goldman Sachs progresses.Issue No: 10/03 2 May 20, 2010
  • Goldman Sachs Global Economics, Commodities and Strategy Research BRICs Monthly share ofMillions of Number of People Crossing Different Income As the Middle Class Grows, consumption Transport, recreation&culture,people Thresholds in BRICs Annually Consumption Becomes More Discretionary140 restaurants and hotels 100% $3,000 Housing, water, electricity & 90% $6,000 other fuels120 $15,000 80% $30,000 Health 70%100 60% Education80 50% 40% Communication60 30% 20% Furnishings, household40 equipment & maintenance 10%20 0% Clothing & footwear 1,000- 1,500- 2,000- 3,500- 20,000- >35,000 1,000 1,500 2,000 3,500 7,500 20,000 35,000 7,500- 800- 0 Food, beverages, tobacco, 00 10 20 30 40 50 clothing and footwear Source: GS Global ECS Research Source: GS Global ECS ResearchMiddle Class Growth in the BRICs Will Drive Global Consumption countries pass through industrialisation and GDP per capita rises to around US$1,000-$3,000, savings and As investments typically rise. On the flipside, consumption (as a share of GDP) usually falls during this period. Over the past decade, China and India have for the most part stayed within this lower income range, characterised by a low share of consumption and high savings. believe the annual rate for the number of people with income rising above US$3,000 has peaked. That is, China We and India are at an inflection point. The income of tens of millions of people is rising above this key threshold every year. As we discussed in our Global Portfolio Strategy piece “The BRICs Nifty Fifty,” these trends imply an acceleration in demand potential. This will impact the types of products the BRICs import—the import share of low value added goods will fall and imports of high value added goods, such as cars, office equipment and technology, will rise. In a recent Global Economics Weekly (GEW 10/13, “Emerging Markets Gaining Prominence in Global Trade”), we showed that the share of exports to the BRICs is increasing in both developed and emerging countries, and this trend is likely to continue as demand from BRICs consumers rises in the next decade. % Last Decade, the BRICs Equity Performance Massively Outperformed the G3Will the BRICs’ Equity Outperformance Continue? 1000 800 Equity Return from 1/1/2001 - presentThe last decade was a BRICs’ decade for stocks: the Russian traded index rose by a sizeable 884%, followed by 600 China H-Shares (610%), the BSE in India (319%), and the 400 Bovespa in Brazil (294%). While BRICs equity markets 200 may continue to do well, some factors that led to this 0 extraordinary outperformance are less clear now. -200 Japan (Nikkei) Europe (EuroStoxx50) China (H-shares) Brazil (Bovespa) India (BSE) Russia (RTS) US (SPX) the one hand, if one believes in the immense potential of On rising consumer demand in the BRICs, particularly from the middle-income section of the population, this may help to support market performance over the next decade, both in the BRICs and other countries that can take advantage of Source: GS Global ECS Research increased demand. Our near-term growth views are also Index BRICs Equity Indices stronger than consensus across the BRICs. 1200 the other hand, markets generally tend to reward growth On Brazil Bovespa stories most when they are much better than expected or are 1000 Russian Traded Index in markets that are out of vogue. In the past decade, BRIC India Sensex equity markets outperformed significantly because the 800 China H-Shares strong growth of these economies surprised many and the BRICs themselves came into focus. At the same time, 600 valuations were low relative to the very frothy valuations 400 that existed in many major markets in 2000. Now that the BRICs story is better known, expectations are higher and the 200 valuation gap is much smaller, the same degree of outperformance seems much less likely, even if the BRICs 0 deliver solid returns. 01 02 03 04 05 06 07 08 09 10 Source: GS Global ECS ResearchIssue No: 10/03 3 May 20, 2010
  • Economic Activity in the BRICsIndustrial production in China and India moderated in CPI inflation picked up in China to 2.8%yoy in April.March, while IP in Russia and Brazil both came in Inflation also rose in Brazil, reaching 5.5%yoy, while ithigher in yoy percentage terms. continues to moderate in Russia. %, yoy BRICs Industrial Production %yoy, SA BRICs Inflation30 3525 Brazil 30 Russia20 India 25 China1510 20 5 15 0 10 -5 Brazil 5 Russia-10 India 0-15 China -5-20 00 01 02 03 04 05 06 07 08 09 10 00 01 02 03 04 05 06 07 08 09 10In China, the trade balance turned to a deficit in March Over the past month, the BRIC currencies have alldue to distortions from the Lunar New Year, but the depreciated vs the USD except for the CNY. The BRLtrend of a declining trade surplus is clear. depreciated 3.0%, the RUB 5.0% and the INR 2.5%. US$ bn, SA BRICs Trade Balance Index BRICs Exchange Rate Performance40 Brazil 130 Brazil Appreciation30 Russia Russia India India 115 China China20 10010 85 0 70-10 55-20 05 06 07 08 09 10 00 01 02 03 04 05 06 07 08 09 10We, Dominic Wilson, Swarnali Ahmed and Alex Kelston, hereby certify that all of the views expressed in this report accurately reflect personal views, which have not been influenced byconsiderations of the firm’s business or client relationships.Global product; distributing entitiesThe Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachsoffices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. 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Supportingdocumentation will be supplied upon request.All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor isGoldman Sachs responsible for the redistribution of our research by third party aggregators. For all research available on a particular stock, please contact your sales representative or go to www.360.gs.com.Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282.No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.© Copyright 2010, The Goldman Sachs Group, Inc. All Rights Reserved.Issue No: 10/03 4 May 20, 2010