A Look at Brazil: Economic Powerhouse or Shaky Success?

  Tags: Economics , Topical & Trends , Emerging Markets

Brazil is currently the seventh largest economy in the world (in nominal GDP terms) and the largest economy in South America. The country is currently experiencing an economic boom; in 2010 it expanded by 7.5% in real terms. Now the country’s problem may be an overheating economy, and the government’s ability to engineer a soft landing will determine the economy’s path over the next few years.

High interest rates have strengthened Brazil’s currency in recent years, and this has led to surging imports, in particular of Chinese goods. In 2009, China overtook the United States as Brazil’s largest trading partner. China’s trade with Brazil in 2010 amounted to $56 billion (exports plus imports) compared to $46 billion with the United States. Trade with China includes significant exports of commodities; in fact, Brazil ran trade surpluses with China in both 2009 and 2010, amounting to $4.0 billion and $5.2 billion, respectively. However, a large portion of the surge in exports can be attributed to soaring commodity prices, especially iron ore.

 

 

 

 

 

 

 
As a major commodities exporter, Brazil is in a unique position compared to most other emerging countries. As the world’s largest exporter of sugar, coffee, orange juice and soy, Brazil has benefited from soaring food commodity prices. In addition, exports of petroleum and iron ore currently compose more than 25% of total exports. However, this dependence on commodities is a double-edged sword—when commodity prices are rising, the economy benefits; but when commodity prices fall, economic growth suffers. The steep 2008 drop in global commodity prices sent the Brazilian economy into recession, albeit a minor one, with the economy contracting by 0.6%.

Annualized quarterly GDP growth has averaged 6.75% over the last eight quarters, and inflation has been creeping up over that same period. Year-over-year CPI inflation peaked at 6.87% in July, well above the central bank’s 4.5 percent target. However, the month-over-month inflation numbers fell sharply in June and July, to .15% and .16%, respectively. The central bank has expressed confidence that those low monthly numbers will soon translate into lower annual inflation statistics. But with an unemployment rate that is near record low levels, wage and price inflation remain a concern.

 

 

 

 

 

 

The central bank also needs to be concerned about potential credit and housing bubbles. Credit to the private sector has exploded in recent years as strong economic growth has led to rapid expansion of a new middle class with increased buying and borrowing power. The percent of individuals more than 90 days in arrears on their borrowing has been increasing rapidly this year, rising from 5.7% to 6.4% in June, but these numbers are still well below their historic highs.

Right now, Brazil is riding a wave of strong economic growth fueled by high global commodity prices. Given its recent strength, Brazil seems poised to overtake France and the UK in the next year or two to move up to the number five economy in the world; however, there are some risks to Brazil’s growth trajectory.