Concerns That Brazilian Economy May Have Peaked

25 July 2011

Last year the Brazilian economy grew by 7.5%, compared with just 2.8% in the US, and it has been expanding on average around 5% a year. This has led some investors and economists to say the economy may have peaked. If this really is the case then it would be an amazing turnaround, and even though there are certain signs which could be construed as being worrisome, the Brazilian government has one major thing in its favour. It saw at very close quarters exactly what the US went through a few years ago, and is already taking steps to ensure this doesn't happen in Brazil.

 

Brazilian GDP growth is slowing, and is predicted to be 4.5% or 5% this year. Even though this is considerably less than last year's 7.5% GDP growth it is still pretty reasonable. At the same time inflation is rising due to increased consumer demand, and has increased from an all-time low of 1.65% in 1998, to 6.7%. As inflation rises it can severely impede economic growth as high prices discourage consumer spending. The government is already taking steps to curtail inflation by increasing interest rates and tightening consumer credit.

 

Brazil exports a lot of commodities, including coffee, sugar, iron ore, orange juice and soy. Some experts are concerned that the country is over dependent on commodities and that other areas such as industrial production are too weak. This is very much a long-term concern as Brazil does a huge amount of trade with China and the US, and especially where China is concerned demand is unlikely to fall. Then there are concerns about low unemployment, as apparently this can be a sign that an economy has peaked. It's probably a problem that many Western countries would love to have right now.

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