Brazil faces 1970s stagflation as resource boom wilts

Brazil has been forced to tighten monetary policy to curb inflation despite a slump in growth and a manufacturing crisis, raising fears that the country’s economic model is breaking down.

The central bank raised interest rates a half point to 8pc, bucking the worldwide trend towards looser money. The surprise move came hours after the release of data showing growth remained stuck at 1.9pc in the first quarter.

paige_follett: For the last decade, we have all been told endlessly that the BRICs were the wave of the future for the global economy. It hardened into conventional wisdom amongst financial pundits. It was impossible to read their work without encountering their confident predictions of a global power shift to the BRIC bloc. Yet here we have a neatly adumbrated survey of a failing Brazil. Russia bet hugely on natural gas exports to offset its demographic implosion, just in time for American shale gas technology to start a steady tumble in prices. India continues to be crippled by its comical inability to create functioning infrastructure. China is drowning in bad debt to its regional and parastatal enterprises and its workforce are on the wrong end of a rapidly steepening age curve. Once again, the conventional wisdom turned out to be anything but wise.

Pheasant_Plucker: NatGas is regionally priced due to transportation issues. Crude oil is readily transported and is less sensitive to location in relative price terms. US is $3 and EU is $11. Russia is still making money hand over fist on it. They own the worlds largest reserves. So US nat gas prices do not impact Russian prices significantly.

landak: Is that because NatGas is much more expensive to ship? Surely there's a huge incentive to build new shipping capacity with such a large price discrepancy. NatGas is actually trading around $4 in the US presently.

sailor25: Shipping had a chronic over capacity a few years ago and more building was on going (we had ships sitting empty for so long they had to literally start steaming around in circles every few weeks to keep the barnacles off the hull).   I always heard that the problem was in getting facilities to liquefy the gas not the actual shipping. LNG is chilled to -180C, the facilities required to get it to that temperature isn’t something you can set up quickly or cheaply.

Augustine: I'd argue that the whole BRIC hype was anything but conventional and more of a contrarian wisdom.

bloodredd: With infrastructure decades behind, especially main roads not fit for purpose, a legal system that combines corruption with total inefficiency, a civil service that suffers from a lack education and real purpose, what else would anyone expect. The Brazilian car industry has been accused of building cars that are not up to standard in a crash. People don't pay their taxes because the money is stolen by the politicians, and this is an old complaint. And so the wheels come off as the government pushes forwards with its only true aims, getting rich and getting reelected.

elliemaesgrandad: * They are trying to manage their problems by fiddling around with wage and price controls and other half-baked measures to treat the symptoms. There is a whiff of Argentina to this. * More like the smell of socialist Britain four decades ago?

Toby: more like socialist Britain today

nobodyaskedus: But the BBC  joyfully told us that  Brazil had overtaken the UK in GDP and was a great example of how we in The West had it all wrong, and The BRICS were doing far better All this, when none of the  BRICS  have the EU pushing  ridiculous   green policies on them , making it even more difficult to do business

chris_xxxx:  The UK retook the 6th position from Brazil last year in the world GDP table.

billsimpson: It is hard to believe that a country the size of the UK can have a higher GDP than somewhere with the size  (bigger than Australia, but all livable land), natural resources, and far larger population, like Brazil. Brazil doesn't have a winter to contend with snow and heating bills. No desert areas. Great weather. Oil. Plenty rain. Makes planes and the subway cars for NYC. It must be the education of you Brits.  Or the Brazilians spend too much of their time on Carnival preparations. New Orleans is almost like that.   

bandraboy: Ambrose you could be talking about Australia here: 1) Dutch disease decimated the industrial base 2) falling currency now that China has slowed down the purchase of raw materials 3) Budget deficit because of the fiscal transfers required as industry was wrecked 4) you mention Brazils car industry-Ford has just announced that it is closing its Australian manufacturing operations 5) But Australia will never be Brazil on the football field!

Tony Virgo:  USA is ranked #1 yet its manufacturing sector is only %5 of its economy, same with Australia which is running a current account surplus. Like USA Australia has an advanced economy comprised mainly of services, commodities and the digital economy… it ia ranked 16th and could not be less like Brazil. Australia does not have the population to support three car manufacturers. They should have pushed out Toyota because it is heavily subsidized by Japan where the Australian car manufacturers are the least subsidized in the world therefore the most efficient. The Ford Territory 4WD was a popular car.

undergroundman14: I knew it. All this talk about the BRIC nations surpassing the traditional western powers is a lie. China is the only nation with potential, but that's only because of the population size. Brazil is simply too third world, to surpass the likes of Germany or Japan in living standards and real wealth. The problem with the west is that we are following the demographic patterns set by nations like Brazil. We are racially speaking, becoming just like them. Complete with ghetto's and gang violence, but without the nice weather.

Veritas: It would be interesting to plot our recent economic woes against the increase in immigration to see if there is any correlation. 

andymonte: Excellent article. It sums it up very well. Dilma as Lula's handpicked successor is very dogmatic, has no charm, nor willingness to learn. She is a real threat to Brazil's future. The hard earned foreign currency reserves will be burnt in rather stupid transfer payments to get votes, no real attempt to increase productivity and reduce the endless bureaucracy. Brazil has the weather and beautiful smiles (rs, rs) but what a sad lot of PT politicians with an uninspired Dilma on top. The mensalao convicts are still free and may even be knighted instead of sent to prison…Stumbling forward, but right now mainly downwards.

rory1: The flunkies must have to work hard to keep the Brazilian and Argentine presidents at a safe distance from one another.

moraymint: Goldman Sachs' Jim O'Neill was wrong about Brazil then?  No surprise there.

chungkwoyan: Actually there is no BRIC or BRICS, only CHINA. Jim, as fund manager, is over-optimistic as always and because of the overwhelming dislike/jealousy/ignorance   of Chinese light-speed economic development since  the beginning of this century in the west, he had to squeeze  in more countries in the similar catergories to make it palatable to the western nations and media. The rest is news and modern history.

Grumpytom:  Dropped a BRIC then.

Augustine: Do the opposite of whatever GS says in public.  It is a matter of public record from congressional hearings that GS advises its clients and the world to do one thing while they bet on the opposite.

tigrisofgaul: GS probably made a nice bundle for themselves first though. I'm starting to think the often contradictory "advice and consultancy" from that crooked company and others like them is a clever ploy to enrich themselves off the back of gullible investors.

landak: O'Neill wasn't wrong at all-their performance over the last 10 years is pretty impressive. 

moraymint: I thought that the whole 'BRICs is the future of global economics' shtick was supposed to be for at least a generation to come, if not for all time?