Without Economic Recovery, Brazil Is in the “Fragile Five”

Without Economic Recovery, Brazil Is in the Fragile Five

Although the second half of the year will certainly be a little better than the first, Brazil remains nevertheless one of the Fragile Five economies to have experienced a failure of growth. Economists have lowered their growth forecasts for this year and 2015, according to a weekly survey by the Central Bank of Brazil published on Monday, November 10.

Brazil’s gross domestic product (GDP) should thus increase 0.2% this year and 0.8% in 2015, according to the median forecast in a survey of hundreds of financial institutions.

In 2010, when she was first elected to the presidency, Dilma Rousseff – re-elected late October – had inherited a 7.5% growth. The country was then supported by high commodity prices and the consumption of an emerging middle class.

The slowdown in the Brazilian economy began in 2011 with a reduced growth to 2.7%, continuing to poor performance of just 1% in 2012 and 2.5% in 2013. Brazil has even experienced a recession this year, the activity being contracted by 0.2% in the first quarter (compared with the previous three months) and 0.6% in the second quarter.

Decline of industrial sector

The weakness of the international market, including the slowdown in the Chinese economy, is harmful to exports and commodity prices. The industrial sector has been in decline for several quarters, while agriculture braked to a modest growth of 0.2% in the second quarter.

Activity in the manufacturing and construction sectors has been particularly affected in recent months. Especially, investment fell 5.3% in the second quarter from the previous quarter, its worst performance since the beginning of 2009.

This trend worries economists, who accuse the authorities that have opted for a policy to support demand. In the second quarter, consumer spending rose only 0.3%.

Limits of a model

While pointing out the negative impact of the drought that affecting parts of the country, and the “decrease in working days”, linked to the organization of the FIFA World Cup, the Brazilian government had assured in the end of August when publishing the results of the second quarter, that “if there was a recession, it had already passed” and that “the pace was accelerated in recent weeks.”

In late September, however, the government had taken care to cut its growth forecast for 2014 to 0.9% against 1.8% previously. It had already revised its forecast downward in July to 1.8% against 2.5% previously.

The growth forecast for the year shows that the acceleration evoked remains very limited. Not enough, anyway, to reconnect with the “economic miracle” of the Lula years (2003-2010), the model on which the Brazilian economy is built has reached its limits.

Brazil confirms its membership with “Fragile Five”, this class of emerging countries, which also includes Turkey, India, South Africa and Indonesia, described in 2013 by an economist at Morgan Stanley.

These countries are characterized by their economic and financial vulnerability: depreciation of national currencies, high inflation, large current account deficits, exposure to capital flight and low growth.

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