And We Think We Have Interest Rate Problems

Way back in May, I discussed how the popular jeer, “Brazil is the country of the future — and always will be” could be applied to Brazil’s economy.

 It seems as though not much has changed in the six months since — the phrase still applies.

 High interest rates have continued to cut consumer spending in Brazil, leading to the slowest economic pace in nearly two years. Gross domestic product rose by one percent from last year, but this was much slower than the second quarter growth of four percent. Economic estimates had pegged this third quarter growth to be just over two percent, which was twice as much as what was actually seen.

 It is thought that this curb in spending might give President Luiz da Silva the push to cut interest rates earlier than originally planned. As it stands right now, Brazil has a whopping 18.5% benchmark interest rate, which represents the highest in the world.

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 “The economy was saddled with very restrictive monetary and fiscal policy,” Estevao Kopschitz, economist for Applied Economic Research Institute, said. “Manufacturing, services — all these industries are struggling.”

 Brazil’s currency, the real, has dropped, while bonds and stocks have taken a dive as well. The manufacturing industry is stagnating, which is problematic, as it represents about 35% of Brazil’s economy. They are seeing extremely weak growth in industry and services, while agriculture is shrinking.

 “We are reeling,” Jose Carlos Grubisich, chief executive for Braksem SA, Latin America’s largest chemical company, said. “Interest rates remain too high and the real is too strong. It’s not the best business scenario.”

 Many are caught off guard by the sliding economy, as it is said that Brazil is a country that should be able to grow substantially more than three percent.

 In North America, we are very concerned about how quarter-point increases in the benchmark rate will affect consumer spending — it’s no surprise that a benchmark rate of 18.5% is having such a profound impact on Brazil’s economy.

 With all industries slowing, with manufacturing stalled, with consumers unemployed and disgruntled, it looks as though Brazil is an awful long way away from being the country of the future now.