World financial news

As Wall Street rebounds and the U.S. economy shows signs of life, stock prices in the world’s four largest developing economies have climbed even faster.

In the BRIC nations — Brazil, Russia, India and China — they’ve soared by an average of 64 percent so far this year, according to investment blog Seeking Alpha. That’s led many observers to think the four are poised to power the global economy out of recession.

Don’t bet on it.

The global economy this year will still suffer its steepest contraction in trade and industrial production since the Great Depression. Despite their growth, the BRIC nations aren’t powerful enough to fuel a global rebound, and all four face their own economic problems.

The U.S. and the European Union each account for 23 percent of global economic activity and, "There’s no way that 15 percent is going to pull 46 percent," said Jay Bryson, a global economist for Wells Fargo Securities.

This year’s outlook remains grim for rich and poor nations alike. The World Trade Organization in July revised downward its global trade forecast, now projecting a contraction of 10 percent for 2009.

Around the globe, industrial production fell 28 percent from January to March. U.S. manufacturing plants in June were operating at about 64 percent of their capacity, the lowest since records have been kept. Excess capacity is reflected across the major industrialized economies.

CHINA

China, which grew by 7.1 percent in the first half of this year, remains the lone bright spot of global significance. For China and its 1.3 billion people, however, that’s subpar growth, and it’s sparking fear that a rapid expansion in lending may bring the world’s most populous country and the global economy new problems just over the horizon.

China seeks to boost domestic growth, partly by massively expanding bank lending. The nearly $1 trillion in loans granted by Chinese banks or guaranteed by the government in the first half of 2009 is more than 50 percent more than bank lending was for all of 2008.

"The fact that it took the government taking all the risk away from the banks means the quality of that lending is probably dubious," said Daniel Rosen, a partner in the Rhodium Group, a New York-based economic advisory group specializing in China.

However, although the lending boom may spark growth, it may not produce sustainable growth.

"Anybody could have high (economic growth) if they simply take the vault doors off the banks and let the money flow on out. It’s what we called subprime lending in the U.S.," he said.

BRAZIL

Putting the world’s idled factories back to work is no easy task. Take aircraft manufacturer Embraer, one of Brazil’s largest private-sector employers. Dependent on trade and exports, it shed 4,300 workers in February, a fifth of its labor force, posting a $23 million first-quarter loss.

Brazil, with a population of nearly 200 million, accounts for about 1 lowest fee payday loans.2 percent of global economic activity, and after a five-year boom, its job growth today is at a crawl. Tax collection fell 6.3 percent through June compared with the first six months of 2008.

"I really don’t see any sector doing well other than autos," said Pedro Ferriera, an economist at the Getulio Vargas Foundation, a Rio de Janeiro-based economic research organization.

Brazil’s auto sector saw record sales in June, thanks to a federal sales tax holiday, but exports of Brazilian-made cars declined 48 percent in the first half of 2009 from the year-earlier period, the National Association of Car Manufacturers in Sao Paulo reported.

RUSSIA

If the "B" in BRIC is struggling, the "R" is in deep trouble. Russia’s problems have some suggesting the bloc of developing nations should be renamed BIC.

Most forecasters think the Russian economy will contract at least 7 percent this year. The International Monetary Fund projected that Russia’s gross domestic product will increase by 1.5 percent next year, below Brazil’s projected 2.5 percent growth and well below China’s 8.5 percent.

The Russian economy lives and dies by global energy prices. The least populous of the BRIC countries at 140 million, Russia is the world’s second-largest oil exporter after Saudi Arabia, and its economy grew by 8.1 percent in 2007 before falling on hard times last year.

"An underdeveloped judicial system, corruption, lack of proper guarantees for the rights of investors and the overall dependence of everything on oil and gas prices" are holding Russia back, said Vladimir Tikhomirov, chief economist at UralSib bank in Moscow.

INDIA

The "I" in BRIC is also a question mark. India’s economic growth, which averaged 9 percent annually from 2005 to 2008, has been less driven by global trade than Russia’s, Brazil’s and China’s have been. Free-market reforms led to improvements in the standard of living in the nation of 1.1 billion, the world’s second most populous after China, fueling strong growth.

India’s per capita income growth rate is thought to be 5.6 percent in the 2008-2009 fiscal year, which ended on March 31, according to India’s Ministry of Statistics. That’s atop 7.6 percent growth in the 2007-2008 fiscal year.

India is expected to grow by at least 6 percent in calendar year 2009, but it has a new government and an old problem of too much government spending. Its 2008 government deficit was equal to 6.2 percent of its broad economy, a gap that will surely widen this year because India, like many nations, is trying to stimulate its economy with public works spending.

"We know from the U.S. experience that high budget deficits can produce concerns about crowding out future growth," said Philip Suttle, chief economist for the Institute of International Finance.

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