Brazil’s Economy Struggles Amid Corruption, Slowing Output

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We are accustomed to blaming the world’s ills on China’s slowdown and the collapse in commodity prices but in the case of Brazil, once the darling of the investment community with Asian levels of growth and seemingly limitless potential, it is the seeds laid down in those good times just a few years ago that are the cause of so much concern now.

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True, the country has been rocked by a corruption probe of epic proportions, with past and present presidents deeply implicated in the process and political stasis gripping the ruling classes as a result. Brazil’s woes, though, go far beyond the Petrobras scandal, as bad as it is.

Brazil’s Economy Shrinks

The economy shrank by 3.8% last year and is on track to shrink a further 3+% this year in its worst recession since official records began. According to the Financial Times, “GDP in the fourth quarter suffered a contraction of 5.9% compared with the same period a year earlier,” Brazil’s statistics agency, the Instituto Brasileiro de Geografia e Estatística (IBGE), said. “All of the components of internal demand showed falls.”

Christ, symbol of Rio de Janeiro, standing on top of Corcovado Hill, overlooking Guanabara Bay and Sugarloaf, Rio de Janeiro, Brazil

The statue of Christ  overlooking Guanabara Bay and Sugarloaf, Rio de Janeiro, Brazil, is gazing upon a far smaller economy these days as Brazil deals with a massive corruption probe. Source: Adobe Stock/ReadytoGo.

Just five years ago, in 2010, Brazil’s economy was growing at 7.6%. The slowdown is not so much the drop in export earnings from commodities, although that has had a severe impact, but more the policies of President Dilma Rousseff’s left-leaning government and that of her predecessor Luiz Inácio Lula da Silva, who were both constantly interfering in industry, implementing price controls as part of their populist agenda and encouraging aggressive lending by state banks.

As the economy has slowed, confidence has collapsed and tax revenues have fallen as expenditures have continued to rise on the back of enormous federal salary and pension commitments. Although agriculture has held up moderately well, industry has collapsed, down 6.2% last year leading a peak to a trough fall in GDP of 7.2%, said to be the worst recession since the 1930’s.

Real Loses Real Value

Industry’s performance is all the more worrisome since the depreciation in the Real against the US dollar, down 30% in the last year, should have aided exports and shielded domestic producers from foreign competition. Meanwhile, government revenues are falling as tax income is falling, the budget deficit has ballooned to 10%, one of the world’s largest the FT says.

Not surprisingly, unemployment has increased dramatically, from about 4% in 2014 to 7.6% in January, while real wages have contracted, with the burden of job losses falling mostly on the young. Bruno Rovai, economist with Barclays in New York is quoted as predicting unemployment will reach double digits as the recession drags on. One example of the growing pain is bounced checks in Brazil have hit their highest level for the month of January since records began in 1991 at 2.41% of all cleared transactions, while inflation is back and is expected to breach the upper limit of the central bank’s target range of 6.5% this year.

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Brazilians had better make the most of their upcoming 2016 Olympics party because the good times are not expected to roll again until a lot of hard decisions, and even harder actions, are taken to dismantle the damaging policies current and recent governments have inflicted.

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