China on Friday reported that its economy grew at an annualized rate of 8.1 percent in the first quarter, down from 8.9 percent in the fourth quarter of 2011.
The phenomenon of slowing growth in one of the world's booming economies is one we may have to get used to, says Ruchir Sharma, author of Breakout Nations: In Pursuit of the Next Economic Miracles. Sharma is the rare pundit who puts other people's money where his mouth is. He's head of emerging market equities and global macro at Morgan Stanley Investment Management, which runs about $25 billion in emerging market assets.
In Breakout Nations, Sharma takes readers on a tour of the world. And one of his big takeaways is that the huge economies that have been growing at such a rapid clip — the BRIC bloc of Brazil, Russia, India and China — are not likely to repeat their performance of the past decade.
"If you look at the history of investing, you find there's always some theme that captures the imagination in a particular decade, and then it runs out of gas the following decades." Think of tech stocks in the 1990s, Japan in the 1980s, gold and inflation plays in the 1970s. In the 200s, Sharma notes, "every single emerging market did extremely well." Fueled by easy money and rising volumes of trade, emerging economies that grew at a 3 percent clip in the 1980s and 1990s began to sport growth rates of 6 percent or more. "The biggest beneficiaries of this were the largest emerging markets," he said — i.e. the BRICs.
But a look under the hood reveals that these speedsters have some problems. China, Sharma notes, may not be "too big to boom." People tend to overlook the fact that China, with a per capita income of about $6,000, has already become a middle income country. "And it's much harder to grow form a large base." Thirty years of a one-child policy have left China with a demographic imbalance. Rapid urbanization has been a huge driver of growth. But now, 50 percent of Chinese people already live in urban areas. "I'm not saying China is going to collapse, but it can't keep growing out at 8 percent," Sharma said. "China is maturing as an economy and needs to slow down. The country may be shifting into lower gear, and this quarter's GDP report may be the first sign of that trend.
Sharma says that the downshift has already started in the other three components of the BRIC bloc. India, whose economy is hamstrung by political corruption and poor infrastructure, is settling back into a 6-7 percent growth band. Even with the continuing commodity boom, Russia's economy only managed to grow about four percent in 2011. And in 2011, Brazil turned in an unspectacular performance of about three percent growth. Sharma sees Brazil's struggles continuing, in part because it has an expensive currency. "That's making their industries uncompetitive," he said. One of Sharma's favorite indicators is the Four Seasons Index — essentially how much it costs to stay at a posh Four Seasons Hotel in different markets around the world. (I hereby volunteer for the arduous job of compiling the relevant data). "The index shows that Brazil and Russia are two of the most expensive emerging markets in terms of exchange rates."
Daniel Gross is economics editor at Yahoo! Finance
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