Ever since the end of the Great Recession, Britain’s economic recovery has been fragile and precarious. Balanced on the periphery of the ever turbulent Eurozone, most economists, politicians and journalists have kept a watchful eye on the single market, fearful that it will be the source of the next global economic crisis. It seems a likely candidate: last summer the Greek government was forced to implement capital controls amid fears of the dreaded Grexit, and deflationary pressure in the Eurozone exasperated the monetary area’s already cancerous debt pressure.
Yet while Britain’s European Reform directorate worked night and day, remaining posed for a crisis that never came, something unexpected happened. The BRIC nations, Brazil, Russia, India and China, all of whom escaped the Great Recession relatively unscathed, began to wobble. This year, these misfires in the world’s economic engine may become terminal. And if they do, all nations will feel the consequences.
Despite the majority of media attention being focused on the wobbling stock markets of China, perhaps the BRIC nation in the most precarious position is Russia. Under global economic sanctions from the west since 2014 due to their involvement in the Ukrainian crisis, the once mighty Russian economy is now franticly treading water. The Rouble has fallen to its all time low against the US Dollar, at the time of writing being worth 0.013 of a Dollar. The cause of this slump is the much reported decline in oil prices: the Russian government has long relied on oil revenues to fund its large public sector and, with the price of a barrel of bent crude this week falling below the price of a barrel, the Kremlin has been forced to announce public spending cuts of up to 10%, forcing austerity measures on an already suffering consumer population.
The weak Rouble has drastically increased the price of imports,raising inflation to an eye watering 13%. With Russian firms and consumers heavily rely on for high-tech equipment and food from abroad and as such high prices will likely lead to decreased investment and consumer spending this year. This, coupled with the austerity measures announced by the Kremlin means that the Russian economy is likely to stagnate at best, and decline at the worst. This is worrying news for not only Eastern European nations, but several prominent EU states too: even with sanctions, 14% of Russian imports come from Germany. A slowdown in the great bear economy will be felt far and wide.
Russia is by no means the only nation suffering from the newly reduced oil prices: the Canadian dollar has also slumped in value and even Saudi Arabia have been forced to take steps to plug the gap left by declining oil revenues. But perhaps the national economy set to be the most affected by cheap oil is that of Brazil. With an extremely large proportion of the nation’s oil revenues coming from state owned oil firm Petrobas, government scandal that has led to paralysis in the highest decision making circles means that the nationalised behemoth will likely be slow to react, and all of Brazil will suffer. With some of the highest bent crude production costs in the world ($7 cheaper than the current price of a barrel of oil), Brazil has the most to lose from the downturn. With the world set to visit this summer for the Olympic Games, the Brazilian government may be jolted into action in a desperate attempt to save face, but by then it could be too little too late.
With the Chinese government’s inept handling of the month’s stock market crisis, investors now fear a demand shock there. This led to a sharp increase in bond yields across the world, which could be just the start. India, the luckiest of the BRIC family, seems to have weathered the worst of it for now, but if the events of 2016 so far have proved anything, its that no economy is as secure as they appear.