Brazil, Latin America’s largest economy, is in turmoil and teetering on disaster. Just five years ago, as the global economy was in the midst of one of the biggest economic disasters since the Great Depression, Brazil was one of the bright spots. Not anymore. Brazil’s economic outlook for the remainder of 2015 remains bleak. And the outlook for 2016 doesn’t look much better.
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Brazil’s Economic Outlook Goes from Boom to Bubble to Bust
In just five years, Brazil has gone from being an emerging new-world economy to an economic catastrophe. In 2010, the country reported an enviable gross domestic product (GDP) growth of 7.6%. By 2011, it shrunk to 3.9%, falling further to 1.8% in 2012. Last year, Brazil’s GDP growth was 0.1%. And the most recent economic data point to Brazil entering its worst recession in 25 years. (Source: Focus-Economics.com, last accessed June 4, 2015.)
In 2003, the Workers Party came to power. Thanks, in part, to a cash-transfer program called Bolsa Família (family stipend), 40 million Brazilians were lifted into the middle class, currently covering a quarter of Brazil’s population of 200 million. The government also made it easier for people to get credit to buy everything from cars to appliances. (Source: Theguardian.com, December 17, 2013.)
But cheap money becomes expensive when the economy turns sour. And that’s just what happened. Brazil, in large part, relies heavily on exporting commodities like crops and natural resources. Over the last year, countries that buy Brazil’s commodities, notably China and Germany, have seen their economies grind down. As a result, the price of Brazil’s main exports—oil, white sugar, coffee, and soybeans—have tanked.
Brazil’s Imperfect Economic Storm
Brazil has gone from a shining example of prosperity to desolation. And the Brazilian outlook for 2015 and 2016 looks bleak. With government debt increasing, the Brazilian real, the national currency, has lost a quarter of its value in 2015 alone.
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In late May, it was announced that Brazil’s first quarter GDP fell 0.2% quarter-over-quarter; this marks a return to contraction after two consecutive quarters of growth. Personal consumption during the quarter went from 1.1% in the fourth quarter to a -1.5% contraction; the worst results since the fourth quarter of 2008. For 2015, Brazil’s GDP is expected to contract 1.2%. (Source: laht.com, May 29, 2015.)
On June 3, 2015, the Brazilian central bank raised its benchmark rate by an additional 50 basis points from 13.25% to 13.75%. Sitting at a six-year high, this is the fifth consecutive rate hike. And more are expected. (Source: wsj.com, June 3, 2015.)
The aggressive rate hikes are designed to tame the country’s inflation, which currently stands at 8.2%, down to 4.5% by the end of 2016. The interest rate hikes may very well have the desired effect, but at a serious cost; sky-high interest rates make it expensive to borrow and kick-start an economy in the doldrums.
It’s one thing to complain about stagnant wages; but a drop is a whole different story. Higher inflation contributed to a 2.9% month-over-month decrease in real wages in April. That, coupled with higher borrowing costs, has left Brazilian consumer confidence levels hovering around record lows.
The Markit Manufacturing Purchasing Managers’ Index (PMI) fell again in May to a reading of 45.9 from 46.0 in April; the lowest level since September 2011. The country’s PMI index remains below the 50-threshold that separates contraction from expansion. (Source: Focus-Economics.com, June 2, 2015.)
Not surprisingly, Brazil’s business sentiment is deteriorating. In May, the Getulio Vargas Foundation business confidence indicator decreased a seasonally adjusted 1.6% over April’s reading to 71.6 points, the lowest level since the index began in October 2005. A reading below 100 signals that businesses are more pessimistic than optimistic. Brazilian businesses are extremely pessimistic. (Source: Focus-Economics.com, May 29, 2015.)
The economic data coming out of Brazil are dismal and it looks like it’s going to get a little worse before it gets better. At least the country has some shiny new World Cup venues.