On Brazil’s Collapse in Growth and the New Currency Wars

This is a gold level post.

I want to flag this as an issue since no one seems to be talking about it. Brazil’s economy has slowed very sharply of late and along with slowdowns in India and China, it says that the global economy will get less incremental lift from emerging markers.

Here’s the trajectory:

  • Brazil central bank cuts 2011 growth forecast to 3.5%, BBC News, 29 Sep 2011: "Brazil’s central bank has lowered its forecast for economic growth to less than half of last year’s, partly blaming the slowing global economy. The central bank lowered its prediction for growth in 2011 to 3.5%, from 4% that it expected in June."
  • Dip in Consumer Spending Slows Growth in Brazil, NY Times, 07 Dec 2011: "A decline in consumer spending contributed to a slight contraction in the third quarter from the previous three months, according to Brazil’s statistics agency. Economists now see Brazil’s growth in 2011 slowing to 3 percent or lower, a sharp reversal from a booming 2010 in which the economy surged 7.5 percent, the country’s highest growth rate in two decades. Fearing a deeper slowdown, Brazilian authorities last week introduced a fiscal stimulus package, including tax cuts on some appliances and food, intended to get consumers to spend again."
  • Brazil’s GDP Growth of 2.7% Last Year Underperformed BRIC Peers: Economy, Bloomberg News, 6 Mar 2012: "Brazil’s economy last year registered its second-worst performance since 2003 as higher borrowing costs and a currency that rallied to a 12-year high led it to underperform emerging-market peers China and India. Gross domestic product expanded 2.7 percent even after growth accelerated in the fourth quarter, the national statistics agency said today in Rio de Janeiro. The median estimate of 32 economists surveyed by Bloomberg was for the economy to grow 2.8 percent."

Bottom Line: Brazil’s economy has not just been slowing but slowing so fast that the 2011 growth rate has continually been cut as the economy surprised to the downside. The Bloomberg news article makes it seem as if Brazil is the outlier here and it is to a degree because the Indian Rupee has cratered while the Chinese peg their currency. Meanwhile the Brazilian Real has been exceedingly strong. So, it’s the currency which has been a drag on growth.

The FT has it right then when it reports:

Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers.

Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” he said on Thursday after announcing changes to the so-called IOF tax.

In a presidential decree, the government extended the existing 6 per cent financial transactions tax on overseas loans maturing in up to three years. Previously, the levy was applied only to loans with maturities of under two years.

President Dilma Rousseff later weighed in on the debate, vowing to defend Brazilian industry and stop developed countries’ policies from causing the “cannibalisation” of emerging markets.

This points to continued downside risk to economic growth estimates into 2012. Additionally, the spectre of economic nationalism is not confined to Europe where it has played out during the sovereign debt crisis. The reality is that protectionism has only been kept at bay because countries like Brazil and India and China have carried the weight for global growth. Now that these countries are slowing measurably, the political element will certainly become a larger factor.

I would be cautious on Brazil because it is not just an export and currency phenomenon; Brazil is also seeing domestic consumption demand slow dramatically. Moreover, with the developed economies still beset by financial and economic problems, there is going to be no surge in exports to help.

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