Brazil: No Quick Fix for the Crisis
Brazil has been facing a scenario of economic juggling, the report noted, with the Central Bank increase in interest rates to control inflation compromising GDP and lower activity reducing tax revenues and threatening fiscal adjustment. Political uncertainties are also weighing heavily on the country’s economic performance.
This year was expected to be one of adjustments for Brazil, particularly with regards to inflation and public accounts. Inflation ended 2014 at 6.4 percent, close to the target ceiling of 6.5 percent. The reality, however, was worse than the predictions, with even higher pressure on prices and difficulties caused by artificially low fixed prices. Inflation reached 9.49 percent in the 12 months ending September 2015, mainly driven by a 16.3 percent increase in fixed prices and the strong depreciation in exchange rates.
Brazil’s GDP shrunk by 2.6 percent in the second quarter of 2015 year-over-year. On the demand side, activity has been mainly impacted by the free fall in investments, -7.9 percent for the first half of 2015, and by declining consumption, due to increasing inflation and unemployment (8.6 percent for the quarter ending July 2015, versus 6.9 percent in July 2014.
Three sectors have been severely affected by the crisis and downgraded from high risk to very high risk.
In the automotive industry, production fell by 20.1 percent, sales by 22.7 percent, and exports by 10.8 percent between January and August 2015.
In Brazil’s steel sector, the industry’s vulnerability to weak external fundamentals was exacerbated by a sharp deterioration in domestic activity this year.
In construction, the industry fell by 5.5 percent in the first half of 2015 with capacity utilization standing at 58 percent in August 2015, the lowest level observed since the indicator was introduced in 2012.
Brazil’s public accounts figures have rapidly deteriorated. When the incumbent president first took office January 2011, gross public debt stood at 52 percent of GDP. As of August 2015, the same indicator was 65.3 percent of GDP.
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