BRICs could point the way out of the economic mire

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In spite of the magnitude of current challenges, if there was ever a good time for the US, and the world, to face these remarkable challenges, this is it. That is because of the extent to which consumption in the leading emerging market economies – Brazil, Russia, India and China (BRIC) countries – should be able to offset the slowdown in the US.

A large amount of global demand continues to be created from inside the BRICs. This is especially the case with China, where August saw an acceleration in inflation-adjusted reported retail sales to 15.9 per cent. The Chinese shopper alone is contributing more to global GDP than the infamous US shopper. Meanwhile, Brazil has reported much stronger than expected 6.1 per cent GDP growth for the latest quarter.

According to our latest estimates, so far this decade there has been nearly as much global demand from the BRIC countries as from the US. Going forward, their share of global demand will start to move towards that of all the G7 (group of seven leading industrialised nations).

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The US is undertaking a dramatic rebalancing. It has been evident for a long time that the US consumer is overstretched and, at more than 70 per cent of gross domestic product, spending is unsustainable. This has been reversing in the past year. It is quite conceivable that in the next decade, US consumption will fall closer to 60 per cent of GDP.

For global GDP to cope with lower US consumer spending, spending elsewhere has to rise. US spending, at 70 per cent of US GDP, accounts for about 21 per cent of global GDP. If it drops to 60 per cent of the US, it will only contribute 18 per cent.

The BRICs shopper will help compensate for this, and they might also get some help from the German and Japanese shopper, although in a more limited way. That means that in the early part of this adjustment, global growth of 3.5 per cent is perfectly feasible, even if we can't sustain 5 per cent.

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While many in the financial services industry, who are understandably heavily focused on themselves, now believe that there is a curtailment of credit everywhere, it is unlikely to be true that all other countries face the same situation as the US. Indeed, what happens to oil and other commodity prices is probably much more important, certainly for the big emerging market countries, and also for some developed countries, not as constrained by credit, such as Germany and Japan. In this regard, developments of the past few weeks are positive. Lower oil prices are good for real disposable income in many of these places, and almost definitely mean that inflation is going to drop sharply in coming months.

One of the big lessons of the 1987 stock market crash, and again the 1998 Long-Term Capital Management debacle, is that by their fast reactions, policymakers can isolate “Wall Street” from “Main Street”. The US and world economy did not go into a recession in either case. These lessons should be remembered in the actions being undertaken by US policymakers. Supporting Fannie and Freddie, supporting AIG, and now leaning towards some noughties version of the RTC-style rescue of the Savings and Loans institutions are what is needed to ensure that the woes of the banking industry don't cause widespread global economic malaise.

It is a brave person who confidently predicts where we will go in the next few days and weeks. However, the conditions for a significant recovery of equity markets have improved dramatically, not least helped by the sense of “crisis” which makes it easier for policymakers to act.

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US and Chinese policymakers acting in the manner they did last week shows that the leaders of arguably the two most important economies are moving in a pro-active way to contain the crisis. All eyes now turn to see whether such a pro-active response comes from other countries that need to.

In the UK, for example, where mortgage lending has fallen dramatically, and is weaker than the US, some “out of the box” policy measures to mitigate the otherwise severe cyclical slowing should be given serious consideration.

The writer is chief economist at Goldman Sachs