5 Charts To Understand Why Brazil Is Ready To Erupt

Even as Brazil prepares to host the 2014 World Cup and the 2016 Olympics, the  economy has been grappling with slowing growth. Locals have taken to the streets  to protest  inadequate infrastructure and rising costs to host the World Cup.

President Dilma Rousseff has said people have engaged in “information  terrorism” through the media.But it is evident that the country needs some  structural reforms to help revive growth.

We walk you through five key talking points on Brazil’s economy:

Inflation –  Brazil’s inflation  reached 6.5% in 12 months through May. Strong private consumption, supply  shocks, “17% average exchange rate depreciation in 2012,” easy fiscal and  monetary policy, and a rise in import duties, all drove inflation higher.

The concern is that rising inflation will hurt real wages and  consumption.

brazil inflation chart

Wage inflation and  competitiveness – “As a consequence of both the sharp increase  in domestic wages (due to a tightening of the labor market) and the appreciation  of the exchange rate, labor costs in dollars increased sharply (more than 300%  since the end of 2002), matching productivity gains and then eroding Brazil’s  competitiveness,” according to BBVA Research.

brazil competitiveness

Credit growth hits a  wall – Credit-fueled consumption growth has hit a wall in  Brazil. The government needs to address the issue but it’s unclear if they will  considering elections are coming up in 2014.

brazil consumption credit growth

GDP  growth is slowing  – Brazil’s economy grew a mere  0.9% in 2012. Rising wages hurt the Brazilian economy as the country lost  competitiveness. The credit-fueled consumption growth maxed out also hurting  economic growth. Along with other issues like poor infrastructure and high  taxes.

The current account deficit  is deteriorating – “The current account is deteriorating as real  exports of goods and services declined sharply in Q1 against a big jump in  imports.” But the decline in balance of payments (BOP) is nearly done, according  to Societe Generale.

Morgan Stanley analysts see no reason to panic about the decline in BOP, and  attribute most of the rapid decline to “accounting errors from the customs  authority.”

brazil current account

Source: BVVA

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