Will Brazilian Economy Avoid a Major Slowdown?

In the fourth quarter of 2008, Brazil’s gross domestic product fell 3.6 percent, the most on record. Is this a sign that the biggest economy in Latin America fell victim of the global recession or is it just a temporary slowdown?

During the last few years, the main driver of the Brazilian economy has been exports of agricultural and industrial commodities and as long as the global economy was performing well and commodity prices were high, foreign capital was flowing to the country. So, trade surplus along with the fiscal surplus were on the rise. However, as the global financial crisis begins to get worst, the demand for Brazilian products is drying up. For example, in January, and for the first time since March 2001, Brazil recorded a trade deficit. To make things even worst, the unemployment rate spiked to 8.2% in January and industrial production dropped 17%, the biggest fall in 17 years.

Yet, the economy is not in a bad shape when comparing the current situation with Brazil’s past. In fact, improvement in public sector debt, which has been brought down below 40% of GDP and relatively small current account deficit have been helping the overall economy. Moreover, Brazil has built up $200 billion of currency reserves to defend the real and foreign-currency borrowings have mostly been exchanged for real-denominated ones, so the currency deterioration no longer hurt the government’s balance-sheet. More importantly, with inflation steadily going down, the central bank has room to cut rates in order to boost credit supply and domestic demand.

Anna Fedec, contact@tradingeconomics.com
3/11/2009 1:22:54 PM