Brazil in a deep recession

The Herald reports:

’s economy will contract more than previously forecast and is heading for the deepest recession since at least 1901 as economic activity and confidence sink amid a political crisis, a survey of analysts shows.

Latin America’s largest economy will shrink 2.95 per cent this year, according to the weekly central bank poll of about 100 economists, versus a prior estimate of a 2.81 per cent contraction. …

Brazil’s policy makers are struggling to control the fastest inflation in 12 years without further hamstringing a weak economy. …

The last time Brazil had back-to-back years of recession was 1930 and 1931, and it has never had one as deep as that forecast for 2015 and 2016 combined, according to data from national economic research institute IPEA that dates back to 1901.

Brazil currently has unemployment of 7.5% and inflation of 15.4% and negative economic growth. How did it manage this?

The Economist reports:

In 2014, as Ms Rousseff sought re-election, the budget deficit doubled to 6.75% of GDP (the bill has since swelled by another 2.7 percentage points). For the first time since 1997 the government failed to set aside any money to pay back creditors. Its planned primary surplus for this year, which excludes interest owed on debt, of 1.2% of GDP is now expected to turn into a 0.9% deficit. Brazil’s gross government debt of 66% may look piffling compared to Greece’s 175% or Japan’s 227%. But Brazil’s high interest rates of around 14% make borrowing costlier to service. Debt payments eat up more than 8% of output.

It’s the old story of having spending get out of control in a bid to win re-election. They won, but the economy tanked under the burden of their promises.

Red tape, poor infrastructure and a strong currency have rendered much of industry uncompetitive. So consumers have been the main source of demand. A low unemployment rate pushed up wages. In the past ten years wages in the private sector have grown faster than GDP (public­-sector workers have done even better). That allowed consumers to borrow more, which encouraged still more spending. Now the virtuous circle is turning vicious. Real wages have been falling since March, compared with a year earlier, mainly because Brazilian workers’ productivity never justified the earlier rises.

You can’t sustainably rise wages by legislation or even agreement. To be sustainable it has to be on the back of productivity gains.

 

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