Image Image Image Image Image Image Image Image Image Image

Elliott Morss | February 21st, 2018

Scroll to top

Top

No Comments

Brazil: Effects of Global Recession and Future Prospects

© Elliott R. Morss, Ph.D.

In recent postings, I have commented on the difference between the growth prospects of developed and emerging market economies. I have noted the remarkable recovery in Latin American stock markets relative to the rest of the world. Over the next few weeks, I will be publishing a series of studies written by my students at the Business School at the University of Palermo in Buenos Aires. The articles assess the impact of the global recession on these countries and their future growth prospects.

I have already posted country studies on Argentina, Chile, and Colombia. The Brazilian study is published below.

Brazil: Effects of Global Recession and Future Prospects

by Roberto Flamini, Paula Gomez, and Elliott Morss

 

EXECUTIVE SUMMARY

The credit freeze had little impact in Brazil. The economic impact of the global recession in Brazil has been mild compared with previous global downturns. GDP could contract by up to 1% in 2009, far less than what would have been the case in Brazil in a global recession similar situation only a few years ago. Overall, Brazil has become one of the soundest economic powers in the world. With diverse exports, a growing middle class, and a broad natural resource base, Brazil’s prospects are excellent.

 

IMPACT OF CREDIT FREEZE

 

The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, stock markets lost $36 trillion directly following the credit freeze. Globally, markets have recovered cutting stock losses to $22 trillion. Latin American stock markets have risen dramatically.

Table 1. – Global Stock Market Losses (in mil. US$)

Index

Index High

Index Low

Index Recent High

Hi-Now % Loss

Hi-Lo % Loss

Hi-Low

$ Loss

Hi-Now

$ Loss

DJ Eurstoxx 50

4.543

1.810

60,20%

7.210.000

2.763

39,20%

4.700.000

Nikkei 225 (Japan)

18.239

7.569

58,50%

2.590.000

9.844

46,00%

2.040.000

S&P 500 (US)

1.558

683

56,20%

10.350.000

1.059

32,00%

5.900.000

S&P Asia 200

6.749

3.145

53,40%

6.850.000

4.540

32,70%

4.200.000

TSX (Canada)

14.984

7.591

49,30%

810.000

11.173

25,40%

420.000

Argentina (Merval)

2.339

829

64,56%

21.985

2333

0,26%

159

Brazil (Bovespar)

73.516

29435

59,96%

641.844

67413

8,30%

133.079

Chile (IPSA)

3.499

2.101

39,95%

149.307

3465

0,97%

2.416

Colombia (IGBC)

11.439

6461

43,52%

61.599

11693

-2,22%

-2.422

Mexico (Mexbol)

32.721

16.869

48,45%

227.146

31017

5,21%

22.945

Peru (IGBVL)

23.790

6.054

74,55%

23.970

15733

33,87%

31.900

Venezuela (IBVC)

62.013

34172

44,90%

?

54111

12,74%

?

Total 7 LA Countries

1.125.851

188.077

Total

28.660.000

17.550.000

Total Adjusted*

36.000.000

22.050.000

 

Brazil is no exception. The BVSP fell 60 % for a loss of US$642 billion. The Brazilian market has recovered somewhat but is still down 8.30 %.

 

IMPACT OF DECLINING GLOBAL DEMAND

 

From 2003 through 2008, Brazil’s exports grew at an amazing average annual rate of 22%. As a result of the global recession, exports fell by 26% in the first six months of 2009 as compared to the same period last year. Compared to the January-June 2008 period, the export of basic goods decreased by 7.4%, while semi-manufactured goods and manufactured goods decreased by 26.9% and 30.6%, respectively.

But there are early, tentative signs that recession effects are weakening. Between May and June of this year, basic goods exports have grown by 20.2%, semi-manufactured goods by 11.4%, and manufactured goods by 10%. It is expected that Brazil’s exports will gain 11.5% in 2010.

Brazil is the world’s largest exporter of beef, iron ore, sugarcane ethanol, and the second largest exporter of soy products. Other leading exports include wheat, minerals, oil, and transportation equipment (cars and airplanes). Brazil has just discovered large offshore oil deposits that will add to its large natural resource base in coming years.

THE DOMESTIC ECONOMY

LatinFocus (http://www.latin-focus.com/) estimates that Brazil’s GDP will fall by only 0.1% in 2009, with investment falling 12.3%. Unemployment will increase from 6.8% in 2008 to 8.1% in 2009.

But even with the global recession, consumption grew by 2.3% in 2009. Like China and India, Brazil has a rapidly growing middle class. According to the Fundacion Getulio Vargas, this class has grown from 42% of the population in 2004 to 52% in 2008 (Economist Sept. 11, 2009). This class wants all the luxuries enjoyed now in developed nations, and consumer credit has expanded by 28% in nominal terms in each of the last 3 years.

The spending of this growing middle class will be a major deterrent to extended effects from the global recession.

GOVERNMENT POLICIES

The Brazilian Government has recently announced a small ($3.6 billion – only 0.2% of GDP) stimulus package to boost domestic spending. It has also lowered interest rates and eased capital requirements for the banking system.

Like China and Japan, Brazil is concerned about the growing value of its currency – the Real – against the US dollar. Like most currencies, the Real weakened in the immediate aftermath of the global credit freeze, but it is now strengthening. To hold down further Real appreciation, the government has just imposed a 2% tax on new currency transactions. And because it does not want its competitive export position to erode further, it could resort to buying US dollars.

The relatively mild recession has strengthened the public position of President Luiz Inácio Lula da Silva. He has pursued prudent macroeconomic policies in recent years. The government deficit as a percent of GDP has been kept under control. It will increase to 2.9% in 2009 in response to the global recession but is expected to fall back to 2.2% in 2010.

LOOKING AHEAD

At least the first quarter of the 21st Century will be good to natural resource rich countries. And Brazil, with its rich export base, should do very well.

For the short run, consider first the projections made by World Bank. World GDP is expected to fall 2.9% in 2009 and increase 2.0% in 2010. That means Global GDP will not get back to 2008 levels until 2011. Latin America overall will fall somewhat less in 2009 before increasing 2% in 2010.

Table 2. – World Bank Global GDP Growth Estimates

Region

2007

2008

2009

2010

World

3,8

1,9

-2,9

2,0

High Income

2,6

0,7

-4,2

1,3

Developing Countries

8,1

5,9

1,2

4,4

South Asia

8,4

6,1

4,6

7,0

India

9,0

6,1

5,1

8,0

East Asia and Pacific

11,4

8,0

5,0

6,6

China

13,0

9,0

6,5

7,5

Middle East and North Africa

5,4

6,0

3,1

3,8

Sub-Saharan Africa

6,2

4,8

1,0

3,7

Latin America and Caribbean

5,8

4,2

-2,2

2,0

Europe and Central Asia

6,9

4,0

-4,7

1,6

According to World Bank Estimates, Brazil’s ’s GDP is projected to drop by only 1.1% in 2009 before growing by 2.5% in 2010.

Table 3. – World Bank Latin American GDP Growth Estimates

Country 1995-2005 2006

2007

2008

2009

2010

Brazil

2,4

3,7

5,7

5,1

-1,1

2,5

Mexico

3,6

4,8

3,3

1,4

-5,8

1,7

Argentina

2,3

8,5

8,7

6,8

-1,5

1,9

Venezuela

1,6

10,3

8,4

4,8

-2,2

-1,4

Colombia

0,7

6,8

7,5

2,5

-0,7

1,8

Chile

4,2

4,3

4,7

3,2

-0,4

2,7

Peru

3,3

7,6

9,0

9,8

3,0

4,3

 

LatinFocus collects projections from a wide variety of organizations. Its Consensus GDP Percent Change Forecast for Brazil is –0.1% for 2009 and 4.6% for 2010. The LatinFocus Consensus Unemployment Rate Forecast for Argentina is 8.1% in 2009 going to 7.8% in 2010.

Brazil is well on its way to becoming one of the strongest world economies in the 21st Century. With a low population density (22.5 persons/sq. km) versus China (141.7) and India (380.0), and abundant natural resources, the future is bright.

Submit a Comment