Why has Brazil’s Growth Collapsed?



What accounts for this fall from grace?

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Collapse in Brazilian growth.

Arguably the biggest disappointment has been the steady erosion in economic growth. In 2010 Brazil grew by over 7%, but since then a drop in commodity prices and a lack of structural reforms have been punishing for the economy. Brazil did not grow at all last year, and is expected to stagnate again in 2015.

Collapse in Brazilian growth.

Market Realist – Lower commodity prices led to a collapse in Brazil’s growth.

The graph above shows the quarter-over-quarter growth rate in the Brazilian GDP (gross domestic product) over the last four years. The growth rate in Brazil (EWZ) has been largely tepid in that period, and it’s likely to remain so for a while.

As we alluded to in the earlier parts of this series, commodity exports make up an important part of Brazilian GDP. Brazil’s main exports include iron ore, crude petroleum, soybeans, sugar, and coffee. Commodity prices have crashed since mid-2014. This crash hit Brazilian GDP growth recently. This effect underscores the importance of a balanced economy. Russia (RSX) is also baring the brunt of being too dependent on oil.

Along with low growth, both Russia and Brazil are seeing very high inflation rates. The next part of this series sheds more light on this issue.

Within emerging markets (EEM), consumption-driven economies like India (EPI)(PIN) and, to an extent, Indonesia (IDX) look more attractive. Lower oil (USO) prices make India attractive in four ways:

  1. lower inflation
  2. better current account position
  3. better fiscal position due to lower subsidies
  4. higher consumption due to savings at the pump

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