Advertisement

A bleak outlook for Brazil

The Brazilian economy is slipping from recession into depression, with declines in its industries across the board.

772-USD_BRA-634

Brazil is slipping from recession into depression, analysts have warned. In the third quarter of 2015, GDP fell by a record 4.5%. It's the third quarter in a row of falling growth, marking Brazil's deepest contraction since records began in the 1990s. Weak harvests for coffee, sugar, cotton and oranges all hurt, but "the declines were across the board", saysJoe Leahy in the FT. Forestry, cattle, industry and services are all contracting.

Advertisement - Article continues below

The data "reads like an obituary", says Andre Perfeito, chief economist at Gradual Investimentos in So Paulo. Unemployment hit 8.9% in September, squeezing household spending, and capital investment has fallen 12.7% in the last nine months. Brazil's debt was downgraded to "junk" in September.

As the economy has spluttered, public spending has surged, sending gross government borrowing to 66% of GDP. That "may look piffling" compared to Greece or Japan, says The Economist, but borrowing costs in Brazil are far higher, making its national debt costlier to service at a time when slowing GDP is undermining tax revenue and the weak economy is making a fiscal austerity programme politically unpalatable.

But perhaps the biggest worry is that a widening corruption scandal, centred on bribes linked to state-backed oil group Petrobras, has paralysed Brazil's government. Impeachment proceedings were brought against President Dilma Rousseff last week, but in a demonstration of the breadth of the scandal, opposition politicians who led the petition have also been accused of taking bribes and sheltering money in Swiss accounts. Rousseff says she received the impeachment proceedings with "outrage" and intends to fight them.

Earlier in the year, contrarians argued that Brazil's stockmarket sell-off had created the best buying opportunity since 2008. High inflation and Brazil's depressed currency the real (see chart) offered a perfect inroad into the country's consumer stocks, fund managers argued. Some multinationals have also bought into the downturn: British American Tobacco bought out its local Brazilian subsidiary for $2.5bn in October, giving it nearly 80% of the country's cigarette market.

But the Ibovespa index, So Paulo's leading equity index (see chart), has continued to slide, down 22% since April. "The only hope [for the brave] is that things have been so bad this year that they can't get much worse," says Capital Economics.

Advertisement
Advertisement

Recommended

Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Beware the hidden risks when investing in emerging markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Emerging markets: buy when the news is bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular

What gold, bonds and tech stocks have in common
Stockmarkets

What gold, bonds and tech stocks have in common

"Risk off" or "safe haven" assets such as gold and government bonds have been doing well lately. But so have riskier tech stocks. That seems to defy c…
10 Jul 2020
An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
10 Jul 2020