For all the headlines highlighting the economic and political struggles of China, India, and Russia, coverage of the Brazilian economy has been relatively mute. Just fifteen months ago we were ready to anoint this economy as one of the world's future leaders, while today it seems to be treated as an also-ran.
There's little doubt the world's sixth largest economy is indeed under pressure, as plummeting tax receipts there highlight well. The 23% decline in its currency, the Real, over the past year also echoes the performances of the Ruble (-25%) and the Rupee (-19%). Meanwhile, Brazil's default rate jumped to a 6-year high just last month, revealing consumer credit problems which few were predicting just last year, when Brazil's once-blistering housing market was still hot. Combine all this with a sharp decline in the expansion of bank lending and the writing is on the wall for the Brazilian consumer.
In fact, consumer weakness has begun to show up in official economic data as the central bank recently ratcheted down GDP growth expectations to 2% for 2009, the lowest rate in six years. This expected slowdown (GDP growth for 2008 was 5.6%) has resulted in a purge of jobs, with last month's job losses the highest on record.
All of the economic weakness seemed to have been lost on Brazilian policymakers until recently, as the country finally moved to lower the country's prime rate by 100 basis points last week from an other-worldly 13.75% to 12.75%. It is no surprise that the country's default rate has risen so sharply as Brazil, even in the wake of the central bank's easing, still boasts the world's highest interest rates when adjusted for inflation (source: Bloomberg). In conjunction with this latest policy shift was a decision to freeze 37.2 billion Reais of spending.
The prospect of declining tax revenues, stagnating growth, and weakening consumer spending has prompted the government to act, but not necessarily in the way most pundits would hope. Instead of clamoring to stimulate they have decided to give the free market the autonomy to heal itself. Imagine that: a government faced with declining tax revenues deciding to cut spending. It sticks out like a sore thumb in this latest version of the world's economy.
Even if more easing is on the way, which certainly seems likely due to the dovish language provided by the central bank, Brazil is behind the eight ball in regards to fiscal and monetary stimulus as it relates to the rest of the BRIC economies. While Brazil's restraint is commendable, one must wonder whether its fall into relative obscurity is a sign of things to come. Should Brazil's laissez-fare attitude not succeed in helping its economy weather the global financial storm, one may look back and wonder if they were asleep at the wheel. Criticism will most certainly come from the financial press.
Then again, in the future we may look back and wonder why we paid so little attention to the one BRIC economy that seemed to get it. In a world that seems to have fallen in love with government intervention, Brazil's discipline is a refreshing change. Whether or not this approach bears fruit remains to be seen. In the short term, it is likely that Brazil's economy may be worse for the wear as the market is allowed to play itself out. However, over the long term it is likely the Brazilian economy may emerge as the one BRIC brother who acted rationally, with a sound economy to boot.