Australians are excited today about qualifying for the World Cup Finals but the economy of host nation Brazil has been grappling with slowing economic growth.
Locals have taken to the streets to protest about inadequate infrastructure and the rising costs of hosting the World Cup.
President Dilma Rousseff has said people have engaged in “information terrorism” through the media. But it is evident that the country needs some structural reforms to help revive growth.
We walk you through five key talking points on Brazil’s economy:
Inflation – Brazil’s inflation reached 6.5% in 12 months through May. Strong private consumption, supply shocks, “17% average exchange rate depreciation in 2012,” easy fiscal and monetary policy, and a rise in import duties, all drove inflation higher.
The concern is that rising inflation will hurt real wages and consumption.
Wage inflation and competitiveness – “As a consequence of both the sharp increase in domestic wages (due to a tightening of the labour market) and the appreciation of the exchange rate, labour costs in dollars increased sharply (more than 300% since the end of 2002), matching productivity gains and then eroding Brazil’s competitiveness,” according to BBVA Research.
Credit growth hits a wall – Credit-fuelled consumption growth has hit a wall in Brazil. The government needs to address the issue but it’s unclear if they will considering elections are coming up in 2014.
GDP growth is slowing – Brazil’s economy grew a mere 0.9% in 2012. Rising wages hurt the Brazilian economy as the country lost competitiveness. The credit-fuelled consumption growth maxed out also hurting economic growth. Along with other issues like poor infrastructure and high taxes.
The current account deficit is deteriorating – “The current account is deteriorating as real exports of goods and services declined sharply in Q1 against a big jump in imports.” But the decline in balance of payments (BOP) is nearly done, according to Societe Generale.
Morgan Stanley analysts see no reason to panic about the decline in BOP, and attribute most of the rapid decline to “accounting errors from the customs authority.”
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