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For the past ten years, the Brazilian economy has surfed a giant wave. It has been an exhilarating ride, based on two main factors: the rising prices of Brazilian commodities "“ which has boosted the external sector; and a boom in domestic consumer credit, which has boosted internal demand (and was sparked, largely, by Lula’s innovation of allowing credit payments to be deducted directly from workplace wages). Now, however, this twin-pronged Brazilian "model" faces its first serious test. That, probably, is why the recent economic slowdown has attracted so much interest.
The European Union and China are Brazil's two biggest foreign markets. Together, they account for 40 per cent of exports. Now they are slowing. This reduces demand for the real goods that Brazil exports.
At the same time, there is an increasing international supply of nominal assets: these are the inflows of global financial liquidity that have caused the real to rise. The government fears that an ever-stronger real – combined with the infamous "Brazil cost" – will allow competitors to eat domestic manufacturers' lunch. Brasília is right to worry. For one, a smaller manufacturing sector threatens employment, which would in turn slow domestic credit expansion. One early sign of this can be seen in the Brazilian banks that have reported a rise in delinquent debts and slower loan growth.
Brazil is a big and beautiful country with boundless promise. But it has big problems, too. If the going now gets tougher because its twin-pronged approach has been blunted, that need not mean Brazil's good times are over. It just means the polish of its recent "miracle" has been dulled. If self-regard is the enemy of progress, that is no bad thing.
Related reading: Brazil: shedding the bubble wrap, Lex Brazil's erratic economy: why worry? beyondbrics Brazil's "chicken flight" growth, beyondbrics Brazil pensions blamed for curbing GDP, FT Brazil's slowdown, FT
Erratic, but why worry?
Go west
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