20 September 2014

What's Wrong With Brazil's Economy?

For an economy that many experts predicted was on the verge of achieving China-like long-term rates of economic growth, the fact that Brazil slid into a recession in the first half of 2014 is particularly disappointing news.  Worse, Brazil’s economy has performed much worse than any other large emerging market in recent years, despite the wealth of advantages that the Brazilian economy enjoys, including vast natural resources and an expanding domestic market of more than 200 million people.  With presidential and parliamentary elections taking place next month, Brazilians are being confronted with the fact that their country’s economic development is not going according to plan.

Brazil’s economy entered into a recession as the country’s GDP contracted by 0.9% on a year-on-year basis in the second quarter of 2014.  Given the fact that the government of Brazilian President Dilma Rousseff had promised that this year’s FIFA World Cup in Brazil would provide a major boost for the country’s economy, this result was particularly disappointing.  In fact, the World Cup appeared to have contributed to the 5.5% declines in investment and manufacturing output that took place in the second quarter of 2014 and were the key reasons for the economy’s poor performance.  In addition, the construction sector in Brazil contracted by 8.7% during the second quarter, adding to the downward pressure on Brazil’s economy.

It is clear that Brazil’s economic woes are not just the result of one-time factors, but rather of a series of long-term problems that are preventing Brazil from being able to maintain the commodity-fuelled growth rates that were achieved before the slowdown of the past three years.  First, Brazil has failed to invest enough in the country’s infrastructure; particularly infrastructure connected to the country’s key export industries.  This has resulted in Brazil having a much lower level of export competitiveness than many of its emerging market rivals, costing the country needed foreign investment and export opportunities.  Second, the expected surge in consumer spending growth in Brazil has not materialized due to a combination of factors, including high levels of wealth inequality and persistently high rates of inflation.  As a result, Brazil remains too dependent upon natural resource exports for much of its economic growth.

These poor economic results are sure to have a significant impact on Brazil’s upcoming presidential and parliamentary elections that take place next month.  For the past year, it appeared that Brazil’s center-left President Dilma Rousseff would easily win a second term in office, as polls consistently showed her far ahead of her rivals.  However, a combination of these poor economic results and the emergence of former Environmental Minister Marina Silva as a serious rival have raised the possibility of President Rousseff becoming a one-term president.  If President Rousseff is defeated, she will have to look no further than the poor economic results achieved in the final years of her term in office as the key factor in the election.  Unfortunately for her, there is unlikely to be any positive economic news in Brazil before the voters choose her fate next month.