Soaring value of the real has badly hits exports – and without growth, neither the Olympics nor the pope can help
As Pope Francis pushed his way through the crowds in Rio de Janeiro's shantytowns on Thursday, his message that next year's World Cup and the 2016 Olympics would provide jobs and alleviate poverty was greeted with some scepticism.
Brazil is facing hard times. While major sporting events hold out the prospect of a short-term boost to growth and prosperity, they can only disguise a problem that has loomed for some time: that a high currency kills the trade in price-sensitive goods.
The soaring value of Brazil's currency, the real, has badly hurt exports. Last year, the UK sent $3.5bn (£2.28bn) of goods and services to south America's largest economy – up 3.8% on the previous 12 months – while Brazil's exports to the UK were down 13%.
Manufacturing, already inefficient and overpriced after years of protectionist policies, has suffered. Exports of gold and other metals, alongside soya beans and sugar, have also declined. Commodities are the bedrock of Brazil's economy and the combination of a high currency and decline in demand from China, it's biggest customer, was always going to stymie growth.
Bert Colijn, a labour market economist at the Conference Board, said signs unemployment was rising were cause for concern – especially after the riots, which started earlier this month and were still going as the pope began his week-long visit. The unemployment rate is still low at 6%, but is up from 5.8% in May.
In 2010, the country appeared to shrug off a brief recession. GDP growth reached 7.5% – the highest rate for 25 years. But rising inflation forced the government to cool the economy just as the eurozone crisis unsettled international markets. The economy slowed, growing just 2.7% in 2011, and 1.3% in 2012.
Cooling the economy meant shoving up interest rates. However, this tactic made Brazil a more attractive place for international investors in search of high returns on their money. To buy Brazilian assets, investors need to buy the local currency. Increasing demand for the real increased the price, and hence the exchange rate.
With inflation still at 6.7%, the government has little room to stimulate the economy. It is a common problem among emerging economies as China slows to a crawl. Turkey is struggling. So is South Africa. All of them are trying to avoid the vortex of pain when social problems triggered by their stuttering economies only goes to make the situation worse.
Turkey's problem is a persistent trade deficit funded by investment inflows. GDP growth is strong by western standards (the economy raced to 1.6% in the first three months of the year), but the need for foreign investment has kept the currency inflated hampering domestic exporters. Recently, the opposite has been true. Investment has slowed and the currency fallen. The central bank has intervened in the markets to defend the lira, which hit an all-time low against the US dollar earlier this month, but Turkey's international liquidity ratio is weak and it does not have a sufficient stock of foreign exchange reserves to maintain this strategy for long.
Each country is dodging and weaving to overcome its special mix of problems, but in esence they need the world economy to grow at a time when the IMF says in its latest report that the trend is for growth to slow. What happens in China over the next year could prove crucial for their economies and their ability to maintain some semblence of social cohesion.
Article Source : http://www.guardian.co.uk
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