Un mur dans les BRICS

The Federal Reserve, the ECB and the Bank of England are now sharing a common narrative. They all consider themselves at or close to their policy rate peak, although they all maintain a hiking bias. Steering markets away from pricing cuts too early is going to be their main communication problem – which we think will force them to maintain a hawkish rhetoric. Still, while we would agree with the notion that delivering or not “one last hike” is no game changer, optically it probably does not help the ECB, given its past policy errors in 2008 and 2011, that it was the one hiking in September while it is in the Euro area that the signs of recession are probably the clearest now.

As the curtain is falling on the tightening phase of monetary policy, we can take a break from focusing on central banks and explore some of the other trends shaping the macro debate at the moment. We attempt this week to “connect the dots” between China’s efforts are reviving domestic consumption and the BRICS summit last August which, beyond the extension to new members, sent another signal of the “clubification” of the world economy.

Our point is that China’s difficulty to deal with its chronic excess savings will increasingly be a limit to the extension of the BRICS’ project to the whole of the Global South, irrespective of the already wide political fault lines across members. If China continues to post a large, structural current account surplus, at a time when the West is increasingly tempted to reduce its reliance on Chinese supply, then the natural counterpart of China’s excess saving will be a growing bilateral trade surplus vis-à-vis the rest of the Global South. There are exceptions, some emerging countries such as Brazil are posting bilateral surpluses vis-à-vis China but many of them find themselves in the uncomfortable position of being reliant on imports from China while remaining dependent on the West for their exports (e.g., Vietnam). China is increasingly recycling its surpluses as FDIs in the Global South – which can elicit some resistance. The US is a hegemon with a chronic current account deficit. This is probably not a coincidence.