Brazilian Economy Continues to Tumble

September 30, 2015Brazilby EW News Desk Team

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Due to corruption and a tanking economy, recent polls show that President Dilma Rousseff is the most unpopular leader since Brazil's reestablishment of democracy in 1985, according to the Associated Press. Brazil suffers from plunging consumer spending, record-high unemployment and a low-value currency. Brazil is suffering from economic slowdown not seen in 25 years.

China is looking to become more of a consumer-based economy, but the Chinese may want to look at Brazil as a reason why a system heavily reliant on consumerism is not always a good idea. Brazilians once had indulgent spending sprees in the United States, but many in Brazil are placing American trips on hold. The populace struggles with rising food costs, with exorbitant price hikes on necessities such as bread. Inflation is at 9.5 percent, which is well above the central bank's target of 6.5 percent. Brazil's economic system has been dependent on consumption to stimulate growth, but with consumption levels at an all-time low, Brazilians remain in perpetual sluggishness.

Cause and Effect

A majority of Brazil's problems has to do with the turbulent conditions of the commodity market and world demand. Brazil contends with slower-than-expected demand from China, a primary consumer, of Brazilian resources. Waning demand from other markets suffering from a downtrodden world economy leaves Brazil with fewer markets that could have replaced China's weak consumption needs. Brazil's GDP contracted by 1.9 percent in Q2, the nation's second consecutive quarterly fall.

Brazilian Scandal

External demand aside, Brazil also suffers from a damning political scandal that has damaged the government's credibility and turned away many investors. There are the accusations that Petrobras, Brazil's state-owned energy firm, accepted bribes from construction companies for top-tier contracts. Rousseff, who was president during the alleged bribes, is taking much of the political heat but has yet to be accused of any wrongdoing. Instead, the corruption scandal has exposed the systemic corruption entrenched in Brazil's political system, and the scandal itself led to the arrests of several high-profile officials and businessmen in 2015. Facing an irate public and an uncooperative Congress, the government can do little in the way of solving major economic problems.

Few Options

The central bank has few options, having little wiggle room to lower interest rates to stir economic activity. For now, Brazil is stuck in a high-inflation climate that stifles the necessary business activity to get the country on steady footing. At this point, the economy is in a state of free-fall, and analysts say the Brazilian situation will only get worse before any sign of relief is in sight.

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