uploads///stagflation in Brazil

An Analysis of Brazil’s Plan to Alter Its Growth Model

By

Mar. 16 2016, Updated 2:58 p.m. ET

In its third year of recession

Brazil is in stagflation, which means that its growth is stagnant. Inflation in the economy continues to soar. It’s at 10.4% despite the central bank’s several attempts at interest rate hikes. As a consequence, the Selic rate (short-term interest rate) now stands at 14.25%.

The nation has entered its third year of recession. The economy has been declining on account of the commodity price slide, the Petrobras (PBR) scandal involving Dilma Rousseff’s government, and rampant inflation. For some time now, the economy has been characterized by low growth, high unemployment levels, and a rising inflation rate.

Article continues below advertisement

Commodity demand, price slide have hurt Brazil

The commodity price slump has only catalyzed the downfall. Brazil’s commodity exports have also suffered on account of the slowdown in China. Brazil’s growth model has largely been export-driven, with commodities such as iron ore and crude oil among its top exports.

Commodity producers such as Petrobras, Vale (VALE), Gerdau (GGB), and Companhia Siderúrgica Nacional (SID) have been hurt badly. Given the falling competitiveness of its commodity exports, Brazil’s economy is attempting to diversify away from its economic model.

Also, the Brazilian real has been depreciating. Although the depreciating currency should help to improve the competitiveness of Brazilian products in the international and domestic markets, the flood of Chinese products into its territory have turned the tables for Brazil. Brazil may have to resort to using the World Trade Organization’s rules to impose anti-dumping measures against China for shipping exports through third countries.

Brazil’s economic deterioration is attributable to:

  • the commodity price slide affecting all commodity-exporting emerging markets (EEM) (EDC)
  • the slowdown in commodity demand from China, its main export destination
  • the lack of global competitiveness as a result of Mercosur

While the first two factors are beyond Brazil’s control, the economy can certainly do something about improving on the third.

Advertisement

More From Market Realist

  • Open sign on a sidewalk
    Macroeconomic Analysis
    Top Reopening Stocks to Play the Shifting Market Sentiment
  • Morgan Stanley sign and stock numbers
    Macroeconomic Analysis
    Morgan Stanley's Buyback Stock Picks in 2021
  • Black Wall Street sign is sign of ethical investing
    Macroeconomic Analysis
    Ethical Investing Stocks and Funds for Your 2021 Portfolio
  • New York City skyline and Goldman Sachs logo
    Macroeconomic Analysis
    Goldman Sachs: Options Trade Picks to Play Earnings Season Volatility
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.