What's going on?
From China to the United States and elsewhere, there’s been a lot of talk about slowing economic growth recently – but that means slower growth (e.g. their economies are still growing). According to data released on Thursday, Brazil’s economy shrank by 3.8% in 2015.
What does this mean?
The collapse of the Brazilian economy is said to be the worst since the 1930s. It’s blamed on a combination of the huge decline in commodity prices as well as irresponsible management of the economy and government’s finances under the current ruling party. In short, it’s a mess – and efforts to right the ship have, so far, seemed to fail (as we reported in December, Brazil’s relatively new finance minister resigned amid a worsening outlook for the country’s economy). Perhaps the worst news is that no recovery is in sight: economists expect the economy to shrink by another 3.5% in 2016.
Why should I care?
For you personally: It shows how risky it can be investing in “emerging markets.” In the years after the 2008 financial crisis, it was very popular to invest in emerging markets (a.k.a. developing countries) as they were exhibiting much higher economic growth rates than the developed world. But, as can often be the case when following a massive trend, the flood of money into Brazil has fared poorly: the Brazilian stock market is down more than 70% in US dollar terms since its peak.
For markets: Prospects for Brazil and Argentina are, arguably, set to diverge quite sharply. Argentina has been going through an economic crisis of its own, but in November it elected a new, pro-business President. The expectation is that he will do things like cut government spending and boost international investment in Argentina. Brazil is still going in the opposite direction.