Brazil Admits Negative Growth
World Economy

Brazil Admits Negative Growth

Brazil does not look like an economy on the verge of overheating. The IMF expects it to shrink by 3% this year, and 1% next. The country has not suffered two straight years of contraction since 1930-31.
Nearly 1.2 million jobs vanished in the year to September; unemployment has reached 7.6%, up from 4.9% a year ago. Those still in work are finding it harder to make ends meet: real (ie, adjusted for inflation) wages are down 4.3% year-on-year, The Economist reported.
Despite the weak economy, inflation is nudging double digits. The central bank recently conceded that it will miss its 4.5% inflation target next year. Markets don’t expect it to be met before 2019.
The immediate causes of Brazil’s troubles are external: the weak world economy, and China’s faltering appetite for oil and iron ore in particular, have enfeebled both exports and investment.
But much of the country’s pain is self-inflicted. The president, Dilma Rousseff, could have used the commodity windfall from her first term in 2011-14 to trim the bloated state, which swallows 36% of GDP in taxes despite offering few decent public services in return. Instead, she splurged on handouts, subsidized loans and costly tax breaks for favored industries.
These fuelled a consumption boom, and with it inflation, while hiding the economy’s underlying weaknesses: thick red tape, impenetrable taxes, an unskilled workforce and shoddy infrastructure.

Public Finances in Tatters
The government’s profligacy also left the public finances in tatters. The primary balance (before interest payments) went from a surplus of 3.1% of GDP in 2011 to a forecast deficit of 0.9% this year. In the same period public debt has swollen to 65% of GDP, an increase of 13 percentage points. That is lower than in many rich countries, but Brazil pays much higher interest on its debt, the vast majority of which is denominated in reais and of relatively short maturity. It will spend 8.5% of GDP this year servicing it, more than any other big country. In September it lost its investment-grade credit rating.
Stagflation of the sort Brazil is experiencing presents central bankers with a dilemma. Raising interest rates to quell inflation might push the economy deeper into recession; lowering them to foster growth might send inflation spiraling out of control. Between October last year and July this year, the country’s rate-setters seemed to prioritize price stability, raising the benchmark Selic rate by three percentage points, to 14.25%, where it remains.
The alluring real rates of almost 5% ought to have made reais attractive to investors. Instead, the currency has lost two-fifths of its value against the dollar over the past 12 months. It is this pattern of a weakening currency and rising inflation despite higher interest rates, combined with a doubling of debt-servicing costs in the past three years, that has led to the diagnosis of fiscal dominance. The cost of servicing Brazil’s debts has become so high, pessimists fear, that rates have to be set to keep it manageable rather than to rein in prices. That, in turn, leads to a vicious circle of a falling currency and rising inflation.

Risk of Default
Brazil has been caught in such a trap before, most recently just over a decade ago. In a paper published in 2004 Olivier Blanchard, the former chief economist of the IMF who is now at the Peterson Institute, found evidence that rate rises in Brazil in 2002-03 spurred inflation rather than reining it in.
The situation today is different. Real rates are less than half what they were in the early 2000s and only about 5% of government debt is denominated in dollars, compared with nearly half back then.
Meanwhile, Brazil's central bank said on Thursday it will remain vigilant to battle inflation that is under pressure from a widening budget deficit and a sharp fall in the country's currency.
In the minutes of its Oct. 21 policy meeting, the bank said that the "intense" impact of a weakening Brazilian real and uncertainty over fiscal results are complicating efforts to lower near double-digit inflation.


Short URL : http://goo.gl/Tu4Ss6
  1. http://goo.gl/zG0BHl
  • http://goo.gl/4huXuO
  • http://goo.gl/oadKE6
  • http://goo.gl/t3k4Dk
  • http://goo.gl/7m8kQ5

You can also read ...

Cambodia’s economic outlook remains positive, but is subject to downside risks.
The IMF Managing Director Christine Lagarde expressed optimism...
More and more Thai merchants are integrating WeChat Pay and Alipay’s systems to cater to tourists.
The internet has changed the way most people live. Through...
Free trade achieves more good for the planet.
US President Donald Trump’s steel tariffs have brought the...
Qatar Calls to Investigate UAE Bank’s Bogus Deals
Qatar has asked US regulators to investigate the US subsidiary...
More India Bank Frauds Revealed
Over 25,800 fraud cases involving about Rs179 crore ($1.79...
Apparel imports from ASEAN are growing, spurred by low labor costs  in such countries as Vietnam.
Import prices for apparel and daily goods in Japan plunged...
Morocco Currency Reform on Right Track
Few weeks after the launch of the gradual dirham float, the...
Germany to Push for Free Trade at G20
Germany’s new Finance Minister Olaf Scholz warned on Sunday...