The biggest show on Earth otherwise known as the Olympics is now in full flow in Brazil. Indeed there is a golden tinge now from a UK perspective after Adam Peaty broke the world 100 metres breaststroke record twice so congratulations to him. However more of a metaphor for the economic situation came from the two Olympic road races which were admittedly exciting but also very dangerous on the descent part. Of the four leaders at that point in the two races only one remained on her bike and the fall of Annemiek van Vleuten was sickening. I am pleased to hear she is recovering but concussion is an odd business so we cannot yet be sure, but we do know that cycling seemed to have elements of the film Rollerball for a while.
The economic situation
The IMF produced its review of Latin America in April and told us this.
Economic activity contracted by 3.8 percent in 2015 and is projected to decline again in 2016 at the same rate
Not exactly auspicious to hold an Olympics during what is clearly a recession and looking backwards may yet be defined as depression. What is the outlook?
sequential growth is projected to turn positive during 2017; nevertheless, output on average will likely remain unchanged from the previous year.
As to the list of causes of this situation it appears to be rather long.
Economic activity has been contracting because of low business and consumer confidence, high domestic policy uncertainty, weakening export prices, tightening financial conditions, and low competitiveness.
There has been a succession of these as the ratings agencies try as ever to catch up with reality. The Financial Times pointed out this in June.
Many blame Ms Rousseff’s government, which through the granting of ad hoc tax breaks and intervention in the economy sharply increased gross public debt to 67.5 per cent of GDP from just over 52 per cent in mid-2014.
In terms of the Euro area crisis these are by no means large numbers although of course it does exceed the levels of the Stability and Growth Pact but everyone ignored those! However I note that the latest Fitch downgrade from May shows a continued rise in the expected level of government debt.
Fitch forecasts the general government deficit to average over 8% of GDP in 2016-17, down from over 10% in 2015. On current policy settings, Fitch forecasts that Brazil will continue to incur primary deficits during 2016-17. The general government debt burden is expected to reach nearly 80% of GDP by 2017 (making Brazil one of the most indebted sovereigns in the ‘BB’ category) and remain on a rising trend unless growth recovers more materially and fiscal consolidation gains pace.
One factor that is very different to what has become considered to be a modern normal is the price Brazil has to pay to borrow. The ten-year Brazilian government bond yield is at 11.75% so we do see at least one country which the much maligned bond vigilantes have been at play! More seriously we see that debt costs seem set to be an increasing problem for Brazil as it borrows more. The world-wide move to lower bond yields has not passed Brazil by just merely that it started at a very high level of over 16% at the turn of the year.
Foreign investors will have had a good 2016 as not only have bond prices risen but the Brazilian Real has too from above 4 to the US Dollar to 3.16 now.
Interest-Rates and Inflation
With an economy in a severe recession then modern central banking theory would presumably have the official interest-rate in negative territory. Not the Banco Central De Brasil.
Therefore, the Copom unanimously decided to maintain the Selic rate at 14.25% p.a., without bias.
The reason that it has such a high interest-rate is the problem Brazil is experiencing with inflation.
For regulated prices, the Committee forecasts an increase of 6.6% in 2016, 0.2 p.p. lower than the forecast in the June Copom meeting. For 2017, the current forecast of a 5.3% increase in regulated prices is 0.3 p.p. higher than the forecast in the last Copom meeting.
Thus we see a central bank which is pretty much a pure inflation targeter and unfashionably for these times is pretty much ignoring the ongoing recession. The inflation target is higher than we are used to at 4.5% which provokes a wry smile as do not places like the IMF and many economists tell us that higher inflation is a form of economic nirvana?
The central bank also gives us a clear guide to how severe the fiscal problem in Brazil is.
The nominal result, which includes the primary result and nominal interests appropriated on an accrual basis, posted a deficit of R$32.2 billion in June. In the year, the nominal deficit totaled R$197.1 billion, compared with a deficit of R$209.6 billion in the same period of the previous year. In the 12-month period up to June, the nominal result posted a deficit of R$600.5 billion (9.96% of GDP), falling by 0.12 p.p. of GDP when compared with the May’s result.
Sadly this is soaring in response to the recession.
The unemployed population (11.6 million persons) rose 4.5% in relation to the quarter between January and March (11.1 million persons), a rise of 497 thousand persons looking for a job. Compared with the same quarter last year, this estimate increased 38.7%, a rise of 3.2 million unemployed persons in the workforce.
The unemployment rate has risen to 11.3% which is up 0.4% on the previously quarter and a chilling 3% compared to a year before.
In terms of an economy we have learnt that it is also important to look at employment trends as well.
The employed population (90.8 million persons) remained stable when compared with the quarter of January to March 2016. In comparison to the same quarter 2015, when the total employed persons was 92.2 million people, there was decrease of 1.5%, a reduction of 1.4 million persons among the employed.
The employment numbers may be suggesting an end to the current economic decline but the picture for real wages is grim.
The average usual real earnings from all jobs (R$ 1,972) fell 1.5% over the same quarter from January to March of 2016 (R$ 2,002) and had a drop of 4.2% in relation to the same quarter of the previous year (R$ 2,058).
It used to be fashionable to calculate a Misery Index which involved adding the inflation rate to the unemployment rate. Perhaps it got redacted as we began to be told that inflation is good for us. Anyway in Brazil the index is of the order of a thoroughly miserable 17%.
Will the Olympics help much?
Apparently not according to Fitch via Forbes.
Total Olympics infrastructure investment between 2009-2015 reached around R$38.5 billion ($12 billion), a small sum compared to the country’s $2.2 trillion economy. Tourism is expected to generate R$1.3 billion ($400 million) and increase real growth by just 0.02 percentage points – less than half amount originally estimated.
There is much to consider here and if we look for some perspective we see a period where Brazil rode the commodity price boom by exporting in essence to China. This was the era described by the then Finance Minister as the “Currency Wars” as the Real rose in response. This meant that Brazil had a type of Dutch Disease as other production such as manufacturing slowed. Whilst it had successes it is always worrying to see economic systems described as a model as that of President Lula was. There only way is invariably not up after that.
So bust followed and inflation accompanied it as the Real fell. Now we see unemployment rising strongly too. The immediate outlook is not good according to the latest business surveys.
Consequently, the seasonally adjusted Markit Brazil Composite Output Index climbed from 42.3 in June to 46.4 in July, its highest mark since March 2015.
However the decline appears to be slowing and let us hope that such a situation continues. There are plenty of challenges for the new government which includes all the ongoing corruption scandals that have so plagued modern-day Brazil. There is an irony though in that the turn coincides with the Olympics rather than being caused by it. At least there is now some hope that the decline will slow and then stop.
Brexit seems to have had very little impact on UK football transfers from Europe as opposed to the “devastating consequences” promised by Karen Brady to the BBC. However there is one clear consequence so far.
Pogba fee is €105 million. That’s £89 million. Would’ve been £74 million had he been bought before the pound crashed ( @andymitten)
At that exchange rate he was previously sold by Manchester United for just over 1 million Euros so storming business for Juventus. Oh and of course it assumes no exchange-rate hedging.