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The BRICs: propping up the global economy International Business Report 2012 This short report looks

The BRICs: propping up the global economy

International Business Report 2012

This short report looks at the rise of the BRIC economies, their growing importance to the global economy and the trends that will shape their performance. It draws upon the International Business Report (IBR) – a quarterly survey of business leaders, covering 11,500 businesses in 40 economies on an annual basis – as well as forecast data from leading global economists.

covering 11,500 businesses in 40 economies on an annual basis – as well as forecast data
No longer emerging? The collective strength of the BRIC economies (Brazil, Russia, India and China)

No longer emerging?

The collective strength of the BRIC economies (Brazil, Russia, India and China) is of ever increasing importance to the strength of the global economy. Whilst mature economies across the globe grapple with towering budget deficits, anaemic growth and rising unemployment, the BRICs are expanding rapidly, lifting people out of poverty and driving the global economy. The manner in which leaders in the troubled eurozone recently pleaded with these markets for funds to help alleviate the sovereign debt crisis marks yet another definitive step in the transition of economic power from ‘west’ to ‘east’. Indeed, at a recent high-growth markets conference run by the The Economist, the man who first coined the BRICs acronym around a decade ago, Jim O’Neill, now chairman of Goldman Sachs Asset Management, described as “idiotic and insulting” the use of emerging markets in relation to the BRICs. He argues that these economies are “increasingly the driver of everything positive in the world economy” and that they should be grouped alongside Indonesia, Mexico, South Korea and Turkey as “growth markets”. 1

1 Source: GTUK International Markets http://www.grant-thornton.co.uk/thinking/emergingmarkets/ 2 Source: IMF 2011

Of course, when measured on a per capita basis, the GDP of these economies still lags behind that of the G7. However, on an absolute basis, they are catching up fast. The BRICs are forecast to account for 37% of global growth in the period 2011-16, with China alone contributing 22%. This will increase the BRIC share of global output from 19% to 23%. Meanwhile, the proportion of global output produced by the traditional powerhouses in the G7 economies will fall from 48% to 44% over the same period. 2

FIGURE 1: BRICS BUILDING MOMENTUM GDP PERCENTAGE GROWTH RATES 2.3 2.1 Canada 0.8 1.5 United
FIGURE 1: BRICS BUILDING MOMENTUM
GDP PERCENTAGE GROWTH RATES
2.3
2.1
Canada
0.8 1.5
United
Kingdom
1.7
2.0
United States
1.6
1.3
eurozone
3.0
4.4
Brazil
2011
– mature economies
2011
– BRIC economies
2012-16

SOURCE: ECONOMIST INTELLIGENCE UNIT 2011

4.0 4.0
4.0
4.0

Russia

0.2 1.5 Japan 9.8 8.0 China 7.6 8.3 India
0.2
1.5
Japan
9.8
8.0
China
7.6
8.3
India

FIGURE 2: BRICS TAKING A LARGER SLICE OF THE GLOBAL ECONOMY PERCENTAGE OF GLOBAL OUTPUT

Other: 33% BRIC: 19% 2011 G7: 48% Other: 33% BRIC: 23% 2016 G7: 44%
Other: 33%
BRIC: 19%
2011
G7: 48%
Other: 33%
BRIC: 23%
2016
G7: 44%

SOURCE: IMF 2011

Business confidence

Against this backdrop of rapid economic growth, business leaders in the BRIC economies remain more optimistic about the outlook for their respective economies compared with peers in mature markets. The latest IBR quarterly results show net 34% of business leaders indicating optimism over pessimism for the next 12 months, compared with -12% in the G7. Business leaders in mature markets remained cautiously optimistic about their economies up until Q2 of this year. However, by Q3 the slowdown in the United States economy, the fallout from the tsunami in Japan and the sovereign debt crisis in the eurozone saw optimism slide. Whilst BRIC business confidence ticked downwards in both Q2 and Q3, it recovered again in Q4 to stand fully 46 percentage points higher than in the G7. Clearly there are a number of issues facing the BRIC economies. In Russia, oil and gas make up two-thirds of exports and the price of oil will need to be US$120 a barrel if the budget is to balance. In Brazil, the strong real has hurt exporters and growth was flat in the third quarter of 2011. In China housing sales, construction and exports have all slowed significantly in recent months. Whilst in India corruption, inflation and an unwillingness to let foreign investment in are all threats to growth prospects. Further, these markets are now ever more dependent on the global economy with India recently warning that growth was beginning to falter, and top Chinese policymakers describing the outlook as “extremely grim and complicated.” 3 As a result, three-quarters of BRIC business leaders are concerned that the global economy will go back into recession over the next 12 months. Business leaders in India are the most concerned (96%), followed by Russia (87%) and Brazil (76%) with China the least concerned (66%).

3 Source: Financial Times “India and China voice growth fears” 16/12/2011

FIGURE 3: BRICS BUOYANT NET PERCENTAGE OF BUSINESSES INDICATING OPTIMISM LESS THOSE INDICATING PESSIMISM

60 50 40 30 20 10 0 -10 -20 Q4-2010 Q1-2011 Q2-2011 Q3-2011 Q4-2011 BRIC
60
50
40
30
20
10
0
-10
-20
Q4-2010
Q1-2011
Q2-2011
Q3-2011
Q4-2011
BRIC
54
57
44
25
34
G7
11
27
27
-8
-12
Global
23
34
31
3
0

SOURCE: GRANT THORNTON IBR 2012

FIGURE 4: WORRIED ABOUT ANOTHER RECESSION? PERCENTAGE OF BUSINESSES WORRIED THAT THE GLOBAL ECONOMY WILL GO BACK INTO RECESSION

India

Russia

Brazil

BRICs

WILL GO BACK INTO RECESSION India Russia Brazil BRICs China SOURCE: GRANT THORNTON IBR 2012 96
WILL GO BACK INTO RECESSION India Russia Brazil BRICs China SOURCE: GRANT THORNTON IBR 2012 96
WILL GO BACK INTO RECESSION India Russia Brazil BRICs China SOURCE: GRANT THORNTON IBR 2012 96
WILL GO BACK INTO RECESSION India Russia Brazil BRICs China SOURCE: GRANT THORNTON IBR 2012 96

China

WILL GO BACK INTO RECESSION India Russia Brazil BRICs China SOURCE: GRANT THORNTON IBR 2012 96

SOURCE: GRANT THORNTON IBR 2012

96

87

76

75

66

“Economies such as China are catching up fast. With growth rates in mature markets not
“Economies such as China are catching up fast.
With growth rates in mature markets not
expected to reach pre-recession levels anytime
soon, a rebalancing of global economic power
is well underway.”
XU HUA
GRANT THORNTON CHINA

Operations

Business confidence in the BRIC economies extends to their expectations for boosting business performance over the next 12 months. Net 72% of BRIC businesses leaders expect revenues to rise in 2012, compared with 37% in the G7 and 43% globally. Similarly, 58% of those in the BRICs expect to see their profits rise, well above the G7 (26%) and global average (31%). Meanwhile, expectations for exports in the BRICs stand at 24%, slightly above the G7 (17%). Businesses in India are the most bullish in terms of increasing revenues in 2012; net 82% expect to see an increase, ahead of Brazil (78%), China (74%) and Russia (43%). In terms of profitability, China leads the way with net 61% expecting to see a rise in 2012, slightly ahead of Brazil (60%), India (57%) and Russia (42%). Meanwhile export prospects are far higher in India (36%) and China (28%) than in Brazil (16%) and Russia (6%).

FIGURE 5: BRIC BUSINESS BOOMING NET PERCENTAGE OF BUSINESSES EXPECTING AN INCREASE LESS THOSE EXPECTING
FIGURE 5: BRIC BUSINESS BOOMING
NET PERCENTAGE OF BUSINESSES EXPECTING AN INCREASE LESS THOSE EXPECTING A DECREASE
80
70
60
50
40
30
20
10
0
72
37
43
58
26
31
24
17
18
Revenue
Profitability
Exports
BRIC
G7
Global

SOURCE: GRANT THORNTON IBR 2012

Profitability Exports BRIC G7 Global SOURCE: GRANT THORNTON IBR 2012 The BRICs: propping up the global
“Finding the right workers is a serious issue for businesses amid near record low unemployment.
“Finding the right workers is a serious issue for
businesses amid near record low unemployment.
Businesses urgently require more skilled workers
to fuel growth.”
MADELEINE BLANKENSTEIN
GRANT THORNTON BRAZIL

Employment

Employment prospects in the BRIC economies as a whole remain robust; net 45% of businesses increased staff levels in 2011 and a further 41% expect to do so again in 2012. By contrast, even as

jobs were shed in the public sectors just 22% of business leaders in the G7 boosted staff levels over the past 12 months, whilst 26% expect to do so in

2012.

Rather than the challenge of unemployment which many mature governments are grappling with, businesses in the BRIC economies are faced with a shortage of skilled workers; 36% of these businesses believe an inability to find the right workers will act as a constraint on expansion plans over the next 12 months, well above the level observed in the G7 (26%).

FIGURE 6: HIRING PLANS STRONG, BUT WHERE ARE THE SKILLED WORKERS?

1 NET PERCENTAGE OF BUSINESSES EXPECTING AN INCREASE

2 NET PERCENTAGE OF BUSINESSES REPORTING AN INCREASE

3 PERCENTAGE OF BUSINESSES CITING A LACK OF SKILLED WORKERS AS A CONSTRAINT ON GROWTH
3 PERCENTAGE OF BUSINESSES CITING A LACK OF SKILLED WORKERS AS A CONSTRAINT ON GROWTH
45
40
35
30
25
20
15
10
5
0
45
22
25
41
26
27
36
26
28
Employment – past
12 months 1
Employment – next
12 months 2
A lack of skilled
workers 3
BRIC
G7
Global

SOURCE: GRANT THORNTON IBR 2012

lack of skilled workers 3 BRIC G7 Global SOURCE: GRANT THORNTON IBR 2012 6 The BRICs:

Inflation

Inflation remains a key challenge for the BRIC economies. In India the central bank has raised interest rates 13 times in 19 months to try and curb double-digit rises in consumer prices. In Brazil, despite recent easing, the rate inflation remains at 6.6% well above the target of 4.5%. In China, inflation peaked at 6.4% in June but has since dropped to 4.2%, although the expected loosening of monetary policy may see this climb again. In Russia, heavy fiscal spending ahead of the elections next year is likely to keep the rate well above 6%. 4 The majority of business leaders in the BRIC economies are concerned about the impact of inflation on their respective economies. 68% cite it as a concern across all four countries, but this ranges from 94% in India to 58% in China. These figures are supported by the IBR which suggests that net 38% of businesses expect to increase selling prices over the next 12 months, compared with just 18% globally. In India (60%) and Brazil (44%) especially prices are expected to climb. A further 21% of businesses expect to increase salaries above the rate of inflation, compared to 14% globally. However, there are big variations between Brazil (40%) and India (35%), compared with China (15%) and Russia (4%) on this measure.

4 Source: Economist Intelligence Unit

FIGURE 7: INFLATION REMAINS A CONCERN HOW WORRIED ARE BUSINESSES ABOUT EFFECT OF INFLATION ON GROWTH; LAST REPORTED OFFICIAL INFLATION RATE

100

90 80 70 60 50 40 30 20 10 0
90
80
70
60
50
40
30
20
10
0

94 9.3

India

80 6.0

Russia

80 70 60 50 40 30 20 10 0 94 9.3 India 80 6.0 Russia Worried

Worried about inflation

68

BRICs

66 6.5

Brazil

Official inflation rates

SOURCE: GRANT THORNTON IBR 2012/EIU 2011

58 4.1

China

FIGURE 8: WAGE-PRICE SPIRAL DANGERS NET PERCENTAGE OF BUSINESSES EXPECTING TO INCREASE SELLING PRICES/RAISE SALARIES
FIGURE 8: WAGE-PRICE SPIRAL DANGERS
NET PERCENTAGE OF BUSINESSES EXPECTING TO INCREASE SELLING PRICES/RAISE SALARIES OVER
NEXT 12 MONTHS
40
35
30
25
20
15
10
5
0
38 11
18
21
10
14
Selling prices
Salaries above inflation
BRIC
G7
Global

SOURCE: GRANT THORNTON IBR 2012

“Inflation is perhaps the key issue the Central Bank of India is dealing with right
“Inflation is perhaps the key issue the Central
Bank of India is dealing with right now. With
salaries expected to rise over the next 12 months,
businesses will be forced to raise prices to
maintain real profits.”
VISHESH CHANDIOK
GRANT THORNTON INDIA

FIGURE 9: RISE OF THE REDBACK? PERCENTAGE OF BUSINESSES THAT SUPPORT THE US$ AS THE GLOBAL RESERVE CURRENCY

THAT SUPPORT THE US$ AS THE GLOBAL RESERVE CURRENCY   Brazil India China Russia BRICs Yes,
 

Brazil

India

China

Russia

BRICs

Yes, completely38 38 13 13 22

38

38

13

13

22

Yes, but I would like to see greater diversification40 41 30 46 35

40

41

30

46

35

No22 14 41 35 33

22

14

41

35

33

SOURCE: GRANT THORNTON IBR 2012

Finance

Access to finance is an area in which businesses in the BRIC economies struggle more than their peers in the G7. Globally, around a quarter of business leaders cite each of the cost of finance, access to long-term finance and a shortage of working capital as constraints on their ability to grow their business. However, in the BRIC economies, 33% of business leaders cite a shortage of working capital compared with 19% in the G7. Similarly 32% cite a shortage of long-term finance and 30% the cost of finance in the BRICs, well above levels observed in the G7. Further, businesses in mature markets feel much better supported by their lenders. Whilst 78% of G7 businesses feel that their lender is supportive of their business, this drops to 66% in the BRIC economies. The global average is 74%. Interestingly, at a time of such economic volatility, 35% of BRIC businesses say they support the US dollar as the global reserve currency but would like to see further diversification. A further 33% say they do not support the US$ as the global reserve currency, with 22% supporting it completely. Full support is strongest in Brazil and India (both 38%) and weakest in China and Russia (both 13%). At least two in five businesses in Brazil, India and Russia support the US dollar but would like to see further diversification. In China, more than two in five businesses do not support the US dollar as the global reserve currency (35%).

FIGURE 10: STRUGGLING FOR FUNDS PERCENTAGE OF BUSINESSES CITING FINANCE AS A CONSTRAINT ON GROWTH
FIGURE 10: STRUGGLING FOR FUNDS
PERCENTAGE OF BUSINESSES CITING FINANCE AS A CONSTRAINT ON GROWTH
40
35
30
25
20
15
10
5
0
30
19
23
32
24
26
33
19
24
Cost of finance
Shortage of long
term finance
Shortage of working
capital
BRIC
G7
Global

SOURCE: GRANT THORNTON IBR 2012

of working capital BRIC G7 Global SOURCE: GRANT THORNTON IBR 2012 8 The BRICs: propping up

Investment

Investment activity in the BRIC economies looks robust for the next 12 months; net 47% expect to increase investment in plant and machinery in 2012, and a further net 46% plan to expand their R&D activity. Across the G7, investment activity looks slower with net 31% and net 17% planning to increase investment in plant and machinery and R&D respectively. However, there is evidence that businesses in the BRIC economies would like to see their respective governments do more to alleviate the challenges they face in terms of key infrastructure. 18% of business leaders cite the poor quality of transport infrastructure as a major constraint on their ability to grow their operations, compared to just 8% in the G7, and 11% globally. A further 17% of BRIC businesses leaders cite information communications technology as a constraint, compared with 11% in the G7 and 14% globally. An area in which BRIC governments have been investing recently is the bidding for and hosting of major sporting events such as the Olympic Games and the FIFA World Cup. Overall 51% of BRIC businesses believe these events are important in terms of attracting investment. In Brazil, which is to host both the FIFA World Cup in 2014 and the Olympic Games in 2016, 84% of businesses believe such events are an important draw for investment. In Russia, which will host the FIFA World Cup in 2018, 52% of businesses believe these events are important, but in China, which hosted the Olympic Games in 2008 support falls to just 39%.

FIGURE 11: INVESTING FOR FUTURE GROWTH NET PERCENTAGE OF BUSINESSES EXPECTING AN INCREASE LESS THOSE
FIGURE 11: INVESTING FOR FUTURE GROWTH
NET PERCENTAGE OF BUSINESSES EXPECTING AN INCREASE LESS THOSE EXPECTING A DECREASE
45
40
35
30
25
20
15
10
5
0
47 31
35
46
17
25
25
16
17
Plant & machinery
R&D
New building
BRIC
G7
Global

SOURCE: GRANT THORNTON IBR 2012

FIGURE 12: BUSINESS EXPANSION CHOKED PERCENTAGE OF BUSINESSES CITING INFRASTRUCTURE AS A CONSTRAINT ON GROWTH
FIGURE 12: BUSINESS EXPANSION CHOKED
PERCENTAGE OF BUSINESSES CITING INFRASTRUCTURE AS A CONSTRAINT ON GROWTH
15
10
5
0
18 8
11
17
11
14

Transport

ON GROWTH 15 10 5 0 18 8 11 17 11 14 Transport BRIC Information communications

BRIC

Information communications technology

11 14 Transport BRIC Information communications technology G7 Global SOURCE: GRANT THORNTON IBR 2012 FIGURE 13:

G7

14 Transport BRIC Information communications technology G7 Global SOURCE: GRANT THORNTON IBR 2012 FIGURE 13: TURNING

Global

SOURCE: GRANT THORNTON IBR 2012

FIGURE 13: TURNING THE EYES OF THE WORLD TOWARDS YOU* PERCENTAGE OF BUSINESSES CITING MAJOR SPORTING EVENTS AS IMPORTANT TOOL TO ATTRACT INVESTMENT

Brazil

Russia

BRICs

China

TOOL TO ATTRACT INVESTMENT Brazil Russia BRICs China *this question was not asked in India SOURCE:
TOOL TO ATTRACT INVESTMENT Brazil Russia BRICs China *this question was not asked in India SOURCE:
TOOL TO ATTRACT INVESTMENT Brazil Russia BRICs China *this question was not asked in India SOURCE:

*this question was not asked in India

SOURCE: GRANT THORNTON IBR 2012

84

52

51

39

“While energy prices will stay consistently high for a long period of time, we hope
“While energy prices will stay consistently high for a long period of time, we hope
that in the meantime Russia will be able to lessen the economy’s dependence on raw
materials by boosting the export of deeper conversion products instead. Although
such reorientation would demand considerable infrastructure investments, it would
make the Russian economy more competitive in the long run.”
IVAN SAPAROV
GRANT THORNTON RUSSIA

The Grant Thornton International Business Report (IBR) is a quarterly survey of around 2,800 senior executives in privately-held and listed businesses all over the world. Launched in 1992 in nine European countries the report now surveys more than 11,500 business leaders in 40 economies on an annual basis providing insights on the economic and commercial issues affecting companies globally.

The data in this report are drawn from interviews conducted with businesses in November/December 2011.

IBR 2012 METHODOLOGY

 

NUMBER OF INTERVIEWS

SIZE OF BUSINESSES

Brazil

50

50-499 employees

Russia

100

100-499 employees

India

100

50crs-1000crs

China (mainland only)

100

100-1000+ employees

To find out more about IBR and to obtain copies of reports and summaries visit: www.internationalbusinessreport.com. The site also allows users to complete the survey and benchmark their results against all other respondents by territory, industry type and size of business.

Participating economies

Argentina

Malaysia

Armenia

Mexico

Australia

Netherlands

Belgium

New Zealand

Botswana

Peru

Brazil

Philippines

Canada

Poland

Chile

Russia

Mainland China

Singapore

Denmark

South Africa

Finland

Spain

France

Sweden

Georgia

Switzerland

Germany

Taiwan

Greece

Thailand

Hong Kong

Turkey

India

United Arab Emirates

Ireland

United Kingdom

Italy

United States

Japan

Vietnam

Kingdom Italy United States Japan Vietnam IBR BRIC contacts Brazil Grant Thornton Russia Grant
Kingdom Italy United States Japan Vietnam IBR BRIC contacts Brazil Grant Thornton Russia Grant

IBR BRIC contacts Brazil Grant Thornton

Russia Grant Thornton

India Grant Thornton

China Grant Thornton China

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