Economy of Brazil

Juan Varela

22 May 2016

Macroeconomics IP 4

Dr. Matula

Brazil one of the world’s most exciting, enchanting and exotic countries, also one of the world’s biggest in terms of economic power. Brazil currently holds the seventh-largest economy and has a population more than 200 million citizens, most which currently live in poverty according to international standards. Brazil’s rapidly emerging economy however is currently in a recession period and it has lots to do with the slowdown of growth in places like Turkey, Russia, and China, whose demands of natural resources from brazil has slowed significantly as their economies have evolved. The Services sector in Brazil is the most important and accounts for more than 70 percent to total GDP. Followed by the Industry which constitutes 25 percent of the GDP and then Agriculture and Livestock sector accounts for the remaining 5 percent of GDP.

The current Brazilian Gross Domestic Product or GDP is 1.8 trillion which is a -3% growth rate compared to the previous five years of growth the country had endured. The Brazilian economy since 2003 had seen a slow growth in the GDP at around 2.2% and quickly became an emerging economy much like India and China. However, over the past three years, the economy has tumbled quite a bit, causing the GDP to drop -3% with no improvement expected in the near future, as debt continues to grow. According to the Economist.com, all three big rating agencies stripped Brazil of its prized investment-grade credit rating which in turn, deflates the Real, Brazil’s currency (economist.com).[pic 1]

The relationship between the GPD and unemployment goes hand to hand, since the GPD is reliant on the population to have an income to buy goods and services.   As seen in the charts below, the employment rate begins to rapidly increase as the GDP deflates. This deflation of the GPD and raise in unemployment in part has to do with inflation.

Since 2011, inflation has steadily gone up. When President Dilma Rousseff initially took office, the government prematurely cut-off its interest rates which in turn caused inflation rates to rise way above set levels by the Central Bank of Brazil. Although reversed, the mismanagement of finances, and favoritism of industrial policies, left the private sector in ruins. These policies along with a strong Real left the industry uncompetitive, leaving consumers as the main source of demand. A low unemployment rate followed those policies which in turn raised the lower wages and over the past ten years, the public sector has outpaced the GDP.  That pace encouraged consumers to borrow and spend more money, raising the inflation rates to levels of 14.25%, its highest since 2002. [pic 2][pic 3]

Over the past few years however, the currency has been falling, largely because the rises in wages weren’t justified by the productivity output and since Brazil’s minimum wage is indexed to GDP and inflation, a recession will freeze real pay for the millions who earn it. The unemployment rates continue to grow as there are fewer jobs to go around, especially the metropolitan areas, where the unemployment rate was 5% in 2014 and in 2016 increased up to 8.2%

Lastly, the economy in Brazil is likely to remain in turmoil for the next decade. Overall, Brazil has hopes to improve over the next decade as the president is on the verge out of office due to the lack of confidence by the population and allegations of corruption from oil companies. Unfortunately, some economist and organizations such as the International Monetary Fund (IMF) predict hard times as they expect unemployment rates to climb 10% over the next two years before stabilizing. Although, the IMF also expects the GDP to strongly bounce back to 0% and 1% levels over the next few years, recovering from the current crisis and the inflations levels to decrease to 6% levels.