Brazilian Economy Going into Decline

By Sarah de Sainte Croix, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – According to Central Bank statistics, the Brazilian economy is entering a phase of decline. Economists fear that the problems in the eurozone and in the U.S. are beginning to take their toll on Brazil, weakening the demand for Brazilian exports and reducing the inflow of money into the economy.

According to Reuters, the Brazilian Central Bank’s IBC-Br economic activity index, which is widely considered to reflect gross domestic product data, dropped by 0.32 percent overall in the third quarter, despite a slight rise of 0.02 percent in September.

Economists are waiting until December 6th, when official GDP figures for the third quarter will be released, to consolidate their suspicions. However, predictions for economic growth this year have been steadily downgraded from highs of around five percent at the beginning of 2011 to just 3.16 percent in a survey conducted by the Central Bank last week.

This represents an expected reduction of more than fifty percent on last year’s growth, which came in at a 7.5 percent expansion.

Brazil’s benchmark Bovespa index also fell by 22 percent this year and the Real has depreciated significantly against the Dollar since July when it hit a twelve-year-high. The downturn in economic activity mirrors trends witnessed throughout Latin America, according to a recent report published by Brazilian think-tank the Getulio Vargas Foundation (FGV) in partnership with Germany’s IFO Institute.

The FGV report says that the Economic Climate Index (a measure of economic performance compiled from the results for Latin America) fell from 5.6 to 4.4 points between July and October this year. For Brazil, the decline was marginally lower, by 0.2 of a point, than the regional average, falling from 5.8 to 4.8 points.

Besides this, the projected outlook fell from 5.3 to just 3.5 points for Latin America, demonstrating significant pessimism from economists about the shape of things to come.

“Reflecting the uncertainties in the world economic climate, the index [for Latin America] fell below the historical average, signaling the beginning of a phase of economic decline for the region, after being in the boom phase from July 2010 to July 2011,” said a press release by the FGV.

The report reflects that the main problems faced by the region include lack of competitiveness, an insufficient qualified labor force, rising inflation and unemployment levels, and a decline in confidence in government policies, along with the contagious effects of the instability in the global economy.

However, it’s not all doom and gloom. According to the IFO, the average Economic Climate Index calculated for 119 countries throughout the world fell from 5.4 to 4.3 points between July and October, meaning Brazil still came in 0.3 of a point above this average.

And in a further show of confidence on Thursday, Standard and Poor’s became the third ratings agency in a year to upgrade Brazil’s sovereign debt, following on the heels of Moody’s and Fitch earlier in the year.

They raised Brazil’s foreign currency credit rating up a notch to “BBB” and it’s local currency rating to “A-,” praising Brazil’s “growing economic resilience” and “cautious fiscal and monetary policies.”

“Brazil is well-positioned to resist external shocks … After all, the economy is still growing reasonably fast … That doesn’t mean, however, that things won’t get hairy,” summarizes Joe Leahy for the Financial Times.