Brazil’s Dilemma- High Inflation, Low Growth.

When Brazil was selected to be a host country for World Cup 2014, many foreign investors invested in Brazil, expecting a high return. Brazil, one of emerging economies of BRICS, had a rapid economic growth of 6.1% in 2007, when Brazil was elected as host country for World Cup 2014. As World Cup 2014 is quickly approaching, many economists are forecasting Brazil’s economy. But, it is not as optimistic as Brazil’s soccer team winning the World Cup 2014 trophy.

According to the article from Bloomberg Businessweek Brazil Economists See Faster Inflation and Slower Growth in 2014, Brazilian economists forecasted that Brazil’s inflation rate will continue to rise while its economic growth is getting slower and slower. The economists forecasted that Brazil’s inflation rate will rise to 6.35% from 6.30% while growth rate will decrease from 1.69% to 1.63%. The main reason for inflation is Brazil’s drought which drove the food price up.

The two graphs below is obtained from Federal Reserve Economic Data website. After reading the article above, I thought it would be interesting to see how Brazil’s Consumer Price Index and GDP changed over the course of years. From the Consumer Price Index graph, it can be seen that price level has been rising constantly, with a higher rate beginning from July 2013.  The economic growth rate graph from FRED shows a similar trend that was mentioned in the article above. In 2007, Brazil’s growth rate was 6%, when it was selected to host World Cup 2014. From then, the economic growth rate decreased drastically, as low as -0.3% in 2009. In 2010, Brazil’s economic growth recorded a 7.5% high, due to larger spending from the middle class. However, from then Brazil’s economy has been suffering  since then, as growth rate has been in the 1~2% range.

brazil cpi BRAZIL Growth rate

 

Brazil’s central bank has been trying its best to control its high inflation rate. According to the Wall Street Journal article Brazil Central Bank Hints at End to Rate Increases, Brazil’s central bank raised its interest rate for ninth consecutive times, from 10.75% to 11%. This increase in interest rate is to deal with the inflation from supply shock of food crops due to draught.

However, I am worried that Brazilian Central Bank’s decision to increase its interest rate even more will deteriorate Brazil’s economic growth rate. Brazil’s interest rate of 11% sounds really high, and it cannot be a permanent solution for Brazil’s inflation as Brazil’s inflation is mainly based on the supply-shock of food crops. Brazil’s atmosphere is getting hotter and hotter for world’s expectation of its World Cup, yet Brazil’s economy will need more time to recover.

4 thoughts on “Brazil’s Dilemma- High Inflation, Low Growth.

  1. lippmanb

    I agree with you about the Brazilian Central Bank’s decision. An 11% interest rate is extremely high. The bank can certainly afford to lower it. Even a 6% interest rate would be very high, but it could help stimulate more growth than an 11% rate.

  2. xcharles

    Very good post. I liked how you laid out everything with the graphs. I wrote a post on Brazilian bonds a little while ago and how they are receiving more and more foreign capital. However, I was unaware of their interest rate problems. Also, today it seems like they have more problems on their hands that could possibly affect their tourism image for the World Cup. Not sure if you saw this- http://online.wsj.com/news/articles/SB10001424052702303873604579495762934561466?KEYWORDS=squatters&mg=reno64-wsj

  3. jhchamot

    Nice post. I didn’t know Brazil’s interest rate was so high. But I think we have to remember it’s a different economy and it isn’t the same as (for example) the US having the same interest rate. Still, though, I agree it’s not a permanent fix for inflation. Despite social problems the World Cup is bringing, it should help their economy significantly, and maybe increase the value of the Real and decrease inflation.

  4. tyuan@umich.edu'tyuan

    11% is much higher than my expectation. I totally agree with your opinion that it seems it’s not a very brilliant decision. China has similar problem as Brazil but the interest rate is not that high in China. Perhaps Brazil could learn something from China.

Comments are closed.