How the US financial crisis will impact the BRICs

Overview

Worries that the spill-over from US-generated financial shocks will undermine the domestic demand explosion in BRIC countries are overblown. In our view, the on-going demand for imports to fuel this continuing domestic boom in the BRICs will cushion the drop in US growth, turning today’s panic arising from the housing collapse into a more bearable slowdown. The underlying support for such demand comes from a massive increment to liquidity available to spend and invest on the part of both the BRICs and the Mideast oil exporting countries. This year nearly $1.0 trillion will be added to these countries' international reserves.

The biggest risk to the sustainability of the BRICs' continued economic expansion is posed by inflation. Our assessment suggests that India and Brazil are best prepared to roll out anti-inflationary monetary policies if needed. In Russia and China, inflation will get worse before remedial policy actions are launched. We explain why the reasons for this outcome are very different in the two countries.