Brazil Economy Analysis

Brazil: Economics outlook in the coming years

Group 3

RU Fei

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1）Introduction 

In 2011, Brazil, an emerging economy, was the world’s seventh largest economy at that time. However, there was a significant contraction in economic activity in 2015 and 2016. In 2016, Brazil ranked as the ninth largest economy. Moreover, Brazil currently has high inflation and interest rates. Our group decided to select Brazil to assess its economic environment because we want to figure out whether this country will recover from the severe recession. Here below are my analysis.^[1]

2）Recent developments

GDP

GDP in Brazil reached an all-time high of 2.616 trillion USD in 2011. But only after five years, in 2016, the GDP nearly dropped by one third of the peak—to only 1.794 trillion USD. Last year, the GDP increased to 2.056 trillion USD.

After experiencing formidable growth in 2007 and 2008, Brazil’s economy shrank 0.13% in 2009. However, Brazil rebounded strongly the following year, growing 7.5%. In 2015 and 2016, the GDP dropped by 3.6% and 3.4%, following four years of moderate growth. 2017 saw the beginning of a slow recovery in Brazil's economic activity, with 1% of GDP growth. (Figure 1)

The GDP per capita annual growth rate in Brazil showed the same trends as GDP annual growth rate. The GDP per capita reached the peak of 13167 USD in 2013 and declined to 8639 USD in 2016. Now it was last recorded at 9821 USD in 2017. (Figure 2)

Services account for more than 65% of total economic activity. Industry accounts for around 15% of GDP. Additionally, both agriculture and minerals and mining play an important role in Brazil’s economy. Agriculture represents around 6% of GDP. Further, Brazil has extensive deposits of mineral resources and mining and commodities are significant contributors to economic activity. (Figure 3)

Brazil’s economic growth over the past decade has been driven by growing private consumption. Private consumption accounts for more than 60% of economic activity today, while investment contributed just around 20% of GDP and government consumption represented just over 15%. (Figure 4)

Brazil is a major exporter of agricultural and raw materials. In 2017, Brazil's exports accounted for 12% ​​of the total GDP, while the bulk commodities accounted for 50% of the total exports. The main exports include a variety of agricultural products (soybeans, coffee, cocoa, sugar), and also a number of important Metal and energy commodities (iron ore, crude oil). (Figure 5)

Unemployment rate and income

The Unemployment rate in Brazil has risen rapidly since 2014 and reached an all-time high of 13.70 percent in March of 2017. The unemployment rate in Brazil fell to 11.9 percent in September of 2018. It was the sixth month straight decline in jobless rate but the rate still stays at a relatively high level. (Figure 6)

From January 2015 to April 2016, the income in Brazil decreased, reaching a bottom of 2030 BRL/month. Later gradually climbed to approximately 2120 BRL/month in January 2018. (Figure 7)

Budget balance and Debt

The Brazilian government has a long-term budget deficit. Government Budget deficit reached 10.20 percent of GDP in 2015. In 2017, the government budget deficit equaled to 7.80 percent of the country's economy. (Figure 9)

Over the past ten years, the government debt continued to go up. In 2017, the government debt accounted for 74.04% of GDP. (Figure 9)

Inflation rate

Due to the large budget deficit and government debt, the inflation was quite high in past few years. Annual inflation rate in Brazil rose to 9% in 2015. It was the highest inflation rate since 2004. After that, the inflation gradually fell to a relatively normal. Last year, the inflation rate was around 3.4%. (Figure 10)

Interest rate

From 2012 to 2015, the interest rate in Brazil increased from 7.5% to 14.25% because the government continuously raised the benchmark interest rate to deal with the high inflation rate. After the inflation rate declined to a relatively normal level, the government cut the interest rate. The Central Bank of Brazil held its benchmark interest rate at 6.50 percent on 31 October 2018, keeping borrowing costs at the lowest level in modern history amid target inflation and lackluster GDP growth. (Figure 11)

Exchange rate

Real is Brazil’s currency. The exchange rate of Real decreased from August 2014 to April 2016. After that, the exchange rate gradually climbed. In 2018, the exchange rate declined significantly. The reason was the uncertainty of the presidential election in Brazil. In future, the exchange rate of Real may continue to decrease. (Figure 12)

3）Outlook

Private consumption

Private consumption is the main contributor to Brazil’s growth. The decreasing unemployment rate the rising wage level will increase the income, therefore promote consumption. Meanwhile, the decreasing inflation rate will stimulate people to purchase. Consumer confidence in Brazil increased to 110.6 in October of 2018. It is the fourth consecutive improvement in confidence and the strongest since October 2014, showing that consumers are more willing to make purchase. The private consumption is estimated to have strengthened further in the following years. (Figure 7/8/10/13)