Can Brazil Bounce Back?

In recent years, no large economy has performed worse than Brazil, a country that has just now emerged from a devastating recession that began ten quarters ago.  In all sectors of the Brazilian economy, confidence levels have been at rock bottom, battered by Brazil’s endless corruption scandals and a business climate adversely impacted by a series of negative internal and external factors.  Furthermore, while Brazil has managed to finally pull out of its long recession, there are many concerns still facing the Brazilian economy.  Add to this mix the dysfunctional nature of Brazilian politics, and it is clear that any recovery for the Brazilian economy will be tentative at best, and possibly even short-lived.  This is a far cry from the soaring rates of economic growth that Brazil was able to record in the early years of this decade, a time when Brazil believed that it was on the verge of recording China-like long-term rates of economic growth.  Now, any growth in Brazil is welcome news, and a sustained recovery is certainly not assured.

The numbers from Brazil’s recent recession are truly staggering, given the fact that there was not a worldwide crisis at the same time.  Between the start of 2015 and the beginning of this year, the Brazilian economy contracted by more than 8%, a worse performance than any other large economy, including recession-hit Russia.  Since early 2014, Brazil’s economy has contracted by an even worse 10%.  In fact, while most emerging markets outside of Asia struggled over the past few years, few of them approached the scale of the downturn seen in Brazil.  So far this year, growth has managed to return to Brazil, but year-on-year growth rose to just 0.3 in the second quarter of this year, the first time this figure was positive since early 2014.  These poor results have battered the already fragile confidence in the Brazilian economy and the sluggish recovery has done little to boost this confidence.  Only the recent run of higher foreign investment inflows has done anything to boost the weak Brazilian economy, but internal confidence levels will need to rise for Brazil to make a full and sustained recovery.

A number of factors have resulted in Brazil’s poor economic performance in recent years.  First and foremost, Brazil’s level of economic competitiveness fell precipitously over the past two decades, particularly when compared with China and other emerging markets in Asia.  Even within Latin America, Brazil’s competitiveness has waned.  For example, Mexico’s level of economic competitiveness improved markedly against that of Brazil in recent decades, resulting in Mexico winning much of the foreign investment in manufacturing that used to go to Brazil.  Furthermore, Brazil was adversely impacted by the sharp decline in commodity prices in recent years, as much of the growth recorded earlier in the decade was the result of soaring food and mineral prices that followed a surge in demand for such commodities in Asian markets, particularly China.  Add to these factors the fact that the Latin American market has not grown as fast as had been hoped for and it is easy to see why foreign investment levels in Brazil have largely disappointed in recent years.  When all of these factors combined to weaken Brazil’s economic growth potential, confidence levels plunged.  When the scale of Brazilian government’s corruption scandals and economic mismanagement became apparent, consumer, business and investor confidence levels fell through the floor.

For Brazil’s economy, it appears that the worst is over and that growth is set to return, and to accelerate somewhat over the course of the next couple of years.  However, this recovery appears to be weak at best, with growth forecasts showing that it will take three to four years before Brazil’s economic output rises to the level that it reached prior to the recent recession.  This is due to the fact that all of the factors that contributed to the deep recession in Brazil remain in place, and none of them will be remedied over a short period of time.  Furthermore, the process of improving Brazil’s economic competitiveness and removing the pervasive corruption found throughout the country’s political and business systems will be long and difficult.  As a result, we are not forecasting a return to the levels of growth seen in Brazil in the early part of this decade at any point in the next few years.  Instead, Brazil will be faced with a period of relatively sluggish growth, resulting in the country falling further behind many of its emerging market competitors.  This growth will be disappointing for a country that was, not long ago, hoping to be the next fast-growing giant emerging market, and this disappointment could fuel political and social unrest in the years to come.