With Western countries, including the United States and members of the European Union, still suffering from stagnant growth, analysts have been looking to emerging nations, and in particular BRICs to spur growth. Unfortunately, China has been fighting off its own slow down and India is suffering from a currency crisis that could derail growth and investment. Brazil, however, surprised analysts with stronger than expected economic growth.
Brazil’s economy is showing signs of life
Earlier this summer, Brazil was hit by a series of protests that disrupted life and business activities in major cities across the country. Working-class Brazilians and students were upset over rising transportation costs and other fees, while also criticizing the government’s investments in the 2016 Rio Olympics. Poorer Brazilians forcefully wondered if multi-billion dollar investments in an Olympics game were the best way to invest money with so many people living in poverty. What effects these protests could have had, if any, on second quarter growth are difficult to measure. Still, if the economy continues to grow, tensions may ease.
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Now, Brazil’s economy is showing signs of life. Brazil’s growth came in at annualized 6% for the second quarter. Many analysts were predicting of one percent or less. The numbers are not all good, however, as much of the growth was concentrated in the agricultural services sector. In particular, soy bean and corn production surged amid rising global demand. In total, the agriculture sector surged by a solid 3.9%, with soy bean soaring by nearing 24% and corn by over 12%. Manufacturing also recorded a respectable 2% growth, but services grew by only .8%. Service industry numbers are closely watched as it indicates the growth of high-value services, such as IT and business services.
The dropping real may give Brazil advantages in exports
The Brazilian real has been slammed since the start of the year, losing some 20% of its value. Still, the dropping real may give Brazil advantages in exports, and many analysts previously thought the currency was over-valued. The real’s dropping value may actually be the currency normalizing and reaching a more stable and sustainable position. At the same time, however, a dropping currency may increase inflation, a problem that has been plaguing Brazil over the last few years.
Brazil has jacked up interest rates to 9% in an effort to stave off massive inflation. Since July 2012, inflation has consistently come in at over 5%. The strategy might work, however, it could discourage business investment, which will slow down economic growth. Rising costs have become a major source of grievance, especially among poorer Brazilians, however, a slowing economy could prove to be just as detrimental.
Brazil poor infrastructure
Brazil is also continuing to struggle with its poor infrastructure. The massive country, filled with mountains, jungles, and numerous large rivers, is a difficult one to tame, to say the least. Rolling black outs have shut down businesses, and farmers are complaining that they are having trouble getting their products to market. The government has promised to invest in infrastructure, but progress remains slow.
Overall, economists are still expecting Brazil to fall short of the 5% growth target for the year. Compared to other BRICs, including China and India, Brazil has suffered from slow growth over the last two years. In 2011, the economy grew by only 2.7% and in 2012 growth slumped to .9%.
As Latin America’s largest economy, Brazil is frequently looked to as a possible engine of growth within the region. Brazil has a largely inwards focused economy, however, and Latin America is not yet as integrated as Asia, North America, or Europe. On one hand this can limit contagion when one country declines. On the other hand, it can also limit the benefits of economic growth to the handful of countries that are performing well. Still, if growth remains slow, economists will have to look elsewhere to find growth engines.