Tag Archives: Brazil

Contributions to world GDP 2013-16

The Economist produced a graph showing world GDP data and made the following points:

  • India and China account for 65% of world growth
  • Emerging markets contributions in 2016 were down to its lowest figure since 2008 – falling commodity prices would have been a factor
  • Norway contributed less to global GDP with lower oil prices being prevalent.
  • USA with increased government spending and greater export volumes improved its position
  • Brazil has been in negative territory since mid 2014 – interesting point with significant government spending on hosting the Football World Cup and the Olympics.

Maybe a good starter for your classes asking the question who contributes most to world GDP?

World GDP 2013-16.png

 

Brazil’s Stagflation

Brazil EconomyIt’s just the latest soft economic data point to come out of the country, which has been dealing with rising unemployment, inflation, and a weakening currency as its economy shrinks. The serious threat of stagflation is imminent.
“We’re running out of words to describe just how bad conditions are in Brazil’s industrial sector,” Capital Economics said in a note to clients. “The fall in production in April means that industry has now contracted in five of the past six months and that output has returned to the same level it was at the start of 2007.”

The Brazilian economy is in urgent need of sustained growth.
Unemployment – 6.2% and rising .
Growth – quarterly increase is around 0.3%
Investment and consumption is falling
Inflation at an 11 year high of 8.17%.

Source: The Economist

Brazil needs World Cup boost

With the Football World Cup about to commence the Brazilian economy doesn’t look as if it would get past the pool stage. Brazil’s high inflation and low business investment has put a damper on the expected lift from government investment in projects leading up to the World Cup. Business investment fell 2.1% in the first three months of 2014, the biggest decline in two years. Brazil, the world’s seventh largest, has prices rising at 6% per year, above the central bank’s target. The central bank has kept its key interest rate at 11% in an effort to combat rising prices. Furthermore growth prospects have been revised down to 0.4% for the first quarter of this year. The graph below shows that slower consumption and investment will mean below average growth which is unusual considering they are hosting the Football World Cup and the Olympics.
Brazil  stats

Bad figures for Brazil

Recent growth and inflation figures spell bad news for the Brazilian economy. You would normally associate inflation as a consequence of higher growth rates but this looks like potential stagflation – stagnant growth and inflation. Although it is not as threatening as the stagflation era of the 1970’s, one wonders how the economy will get on hosting the World Cup and the Olympics games. You would have thought with these forthcoming events that economic growth would be generated with the huge infrastructure development required.

Brazil - Inflation GDP

China Inequality – new figures released

Here is a recent chart from The Economist. This is the first data on inequality to come out of China for 12 years – remember 0=perfect equality and 1=perfect inequality (all the income is earned by one person). It seems that poorer countries like South Africa, Nigeria and Brazil have benefitted from growth over the last few years but it hasn’t trickled down to lower income groups. As well as being better off Japan and Sweden seems to be more equal societies as opposed to India and China where most people are equally poor.

China Gini

BRIC Update

With the CIE A2 Paper 4 exam approaching I thought it would be useful to update what is happening in the BRIC countries – remember developing countries is a popular area that is examined. I was very fortunate to attend the Tutor2u 10th Anniversary Conference in June this year where one of the keynote speakers was Jim O’Neill of Goldman Sachs who coined the acronym in a 2001 paper entitled “Building Better Global Economic BRICs”.

The BRIC’s are struggling hard to ease policies and maintain economic growth in the face of a slowing global economy not of their own making. Although you might think that these rates are high in a developed nation for these 4 developing countries growth rates need to be maintained at much higher levels in order to keep apace with the factors of production that are coming on stream.

One of the reasons for the slowdown is the economic situation in Europe and the downturn on the USA followed by their own uncertainty associated with the coming fiscal cliff. There are also consequences of the BRIC slowdown are on the commodity market. BRIC countries were the reason behind the economic growth in the past decade, which meant they had a great affect on commodity prices. As economic growth decelerates rapidly in these countries, so does energy and commodity demand. Downward pressure on oil prices and other key commodities, such as copper, are likely to continue until one can be sure that the growth trend in the emerging market countries is moving higher again. We are not at that stage yet. BRIC nations, in their own

Other reasons for the growth slowdown is the ever worsening economic situation in Europe, followed closely by the general lack of economic leadership and market confidence coming from the aging industrial countries. One cannot, however, lay all of the economic challenges in the BRIC countries at the doorstep of Europe’s debt crisis and the massive policy uncertainty associated with the coming fiscal cliff in the US.

BRIC currencies represent high-risk, high- return carry trades, due to the near-zero level of interest rates in the U.S., Europe and Japan compared to the much high rates in the emerging market world. When BRIC currencies start to appreciate it will be a sign of confirmation of two important new trends.

1. A necessary, but not sufficient, condition for BRIC currency appreciation is that the global deleveraging process is abating.
2. To complete the scenario, economic growth and the ability to attract capital needs to return to the BRICs.

Source CME Group Market Insights – 25th July 2012

BRIC’s in 2011 – Source: The Economist – 29th Sept 2012

A2 – Developing Economies and the Global Financial Crisis.

Just completing the Unit 6 of the A2 course and updating my notes on the current issue of debt hangover from the Global Financial Crisis. The FT recently reported that there are worrying signs of private sector credit in emerging economies.

Turkey Brazil Russia – private sector credit in year to April 2012 up 20%.
China – private sector credit in year to April 2012 up 15%.
Poland – private sector credit to GDP 49%

This is seen as inevitable if an economy is going to grow but there needs to be investment in capital which will ultimately increase a country’s productive capacity and long-term development. However a lot of this borrowing has gone into consumer goods rather than capital infrastructure projects. This is especially worrying in Brazil as the transport system needs a major overhaul if it is going to cope with the demands of the Olympic Games in 2016. According to the FT misdirected credit can produce two damaging consequences:

1. When too much money is directed into the housing market bubbles can occur – subprime for instance and more recently China.
2. Poor credit allocation can harm economic growth, both in the short and in the long term.

Although China and Brazil has loosened monetary policy this needs to be accompanied by a process that ensures it is directed to where it is most needed. Jeffrey Sachs in his book “End of Poverty” talked about how a country needs six major kinds of capital:

1. Human capital: health, nutrition, and skills needed for each person to be economically productive

2. Business capital: the machinery, facilities, motorized transport used in agriculture, industry, and services

3. Infrastructure: roads, power, water and sanitation, airports and seaports, and telecommunications systems, that are critical in-puts into business productivity

4. Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems that provide the environmental services needed by human society

5. Public institutional capital: the commercial law, judicial systems, government services and policing that underpin the peaceful and prosperous division of labor

6. Knowledge capital: the scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital

Figure 1 shows the basic mechanics of saving, capital accumulation, and growth. We start on the left-hand side with a typical household. The household divides its income into consumption, taxation, and household savings. The government, in turn, divides its tax revenues into current spending and government investment. The economy’s capital stock is raised by both household savings and by government investment. A higher capital stock leads to economic growth, which in turn raises household income through the feedback arrow from growth to income. We show in the figure that population growth and depreciation also negatively affect the accumulation of capital. In a “normal” economy, things proceed smoothly toward rising incomes, as household savings and government investments are able to keep ahead of depreciation and population growth.
Source: The End of Poverty: How we can make it happen in our lifetime by Jeffrey Sachs (2005).

Ability to stimulate using Monetary and Fiscal Policy

With the stagnating growth levels in the developed world – USA, Europe, etc – the emerging economies are not immune from this environment. Lower export demand for goods and services impacts on average growth levels in those emerging countries. In order to get out this sluggish condition economies can employ both monetary and fiscal policy. However richer nations have tended to exhaust both these policy options by dropping interest rates to exteremely low levels (see interest rates below) and in their inability to exapand their borrowing because of the size of governmets deficits. Emerging economies average budget deficit 2% of GDP, against 8% in the G7 economies. And their general-government debt amounts on average to only 36% of GDP, compared with 119% of GDP in the rich world.

The Economist ranked 27 emerging economies according to their ability to utilise expansionary fiscal and monetary policy. They used 6 indicators to assess a country’s ability to use these policies. The first 1-5 focus on the ease of which countries can manipulate monetary policy interest rates. 6 concerns Fiscal Policy flexibility

1. Inflation – 2% in Taiwan to 20% or more in Argentina and Venezuela.
2. Excess Credit – measures the gap growth rate in bank credit and nominal GDP. Argentina, Brazil, Hong Kong and Turkey have seen credit grow vastly beyond GDP whilst Chinese bank lending is now rising mor slowly than GDP.
3. Real Interest Rates (interest rate – CPI) – tends to be negative in most economies. Over 2% in Brazil and China
4. Currency Movements (against US$ since mid-2011) – Nine countries, including Brazil, Hungary, India and Poland, have seen double-digit depreciations, with the risk that higher import prices could push up inflation.
5. Current-Account Balance – If global financial conditions tighten, it would be harder to finance a large current-account deficit, and so harder to cut interest rates.
6. Fiscal-Flexibility Index – combining government debt and the structural (ie, cyclically adjusted) budget deficit as a percentage of GDP.

From The Economist
The average of these monetary and fiscal measures produces our overall “wiggle-room index”. Countries are coloured in the chart according to our assessment of their ability to ease: “green” means it is safe to let out the throttle; “red” means the brakes need to stay on. The index offers a rough ranking of which economies are best placed to withstand another global downturn. It suggests that China, Indonesia and Saudi Arabia have the greatest capacity to use monetary and fiscal policies to support growth. Chile, Peru, Russia, Singapore and South Korea also get the green light.

Red alert
At the other extreme, Egypt, India and Poland have the least room for a stimulus. Argentina, Brazil, Hungary, Turkey, Pakistan and Vietnam are also in the red zone. Unfortunately, this suggests a mismatch. Some of the really big economies where growth has slowed quite sharply, such as Brazil and India, have less monetary and fiscal firepower than China, say, which has less urgent need to bolster growth. India’s Achilles heel is an overly lax fiscal policy and an uncomfortably high rate of inflation. The Reserve Bank of India has sensibly not yet reduced interest rates despite a weakening economy. In contrast, Brazil’s central bank has ignored the red light and reduced interest rates four times since last August. In its latest move on January 18th, the bank signalled more cuts ahead. That will support growth this year but at the risk of reigniting inflation in 2013. Desirable as it is to keep moving, ignoring red lights is risky.

Poor grow faster than rich

Economics Focus in “The Economist” magazine recently looked at developing countries and reasons why they may grow at a faster rate than their developed counterparts. Robert Barro at Harvard says that this will be the case if:
– the rule of law prevailed
– the terms of trade were favourable
– inflation and government wastefulness remained in check
– families are small in number
– population are health and educated

Goldman Sachs takes the BRICs’ income per person, relative to that of America, as a proxy for their economic backwardness. The bigger the gap, the greater the potential for catch-up growth. The bank also assumes that countries differ in how well they exploit this potential. Some absorb know-how from abroad quicker than others. Their “convergence speeds” would vary, even if the distance they had to cover were the same. The Economist December 10th 2011

The World Bank now rates and ranks emerging economies on such attributes as:
– openness to trade
– corruption
– the diffusion of mobile phones

In 2003 it was estimated that Brazil’s GDP would overtake Italy by 2025 and China would overtake Japan by 2015. Both these countries overtook their above counterparts by 2010. Emerging economies will become the engines of growth in the world economy.

Brazilian soccer players decide to stay at home

With the new English Premier League soccer season upon us next weekend it was interesting to read in The Economist and the Finacial Times in London that there seems to a reverse in the trend of Brazilian players taking up high paid contracts overseas. This is partly due to the continuing strength of the Brazilian economy:

– In 2010 the economy grew 7.5%
– Is the world’s 7th largest economy
– Grew fifth fastest of the G20 countries
– Since 2008 the Brazilian Real has appreciated 35% against the Euro and the British Pound. Also this year it hit a 12 year high against the US$. This has helped clubs to bid for players from Europe.
– The Brazilian Terms of Trade has improved by 27%

In 2010 spending on players in Brazil rose 63% compared with a drop of 29% in Europe. Total number exported from Brazil fell 14% in 2009. The stronger finances of Brazilian clubs are also helping them retain younger players.

Rivalling those in the Premiership, La Liga, and the Serie A Santos, the team of Brazilian great Pele, repelled a reported Chelsea bid for Brazilian teenage star Neymar by offering him a sophisticated compensation package that included revenue from image rights. FT London