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World economies

July 17, 2017

Brazil, the world’s ninth-largest economy by nominal gross domestic product (GDP) and the eighth-largest by purchasing power parity (PPP), is also the largest economy of both Latin America as well as South America. It has a mixed economy with abundant natural resources.

From 2000 to 2012, the country remained one of the fastest-growing major economies in the world, with an average annual GDP growth of over five per cent. Until 2010, it was one of the world’s fastest-growing major economies, as economic reforms had given the country new international recognition and influence. In 2012, Brazil’s economy surpassed the UK’s, temporarily becoming the world’s sixth largest economy.

However, its growth decelerated in 2013 and the country entered an ongoing recession in 2014 amid a political corruption scandal and nationwide protests. In 2015 and 2016, the recession ranked as the worst in the country’s history. Falling commodity prices reduced export revenues and investment weakened the Brazilian currency, the real, and cut tax revenues.

A weaker real made existing public debt more expensive. Lower tax revenues strained the government budget. For the first time since 1931 Brazil’s GDP fell in two consecutive years, declining by 3.9pc in 2015 and 3.6pc in 2016.

Two years of deep recession have dragged down tax revenues and eroded government finances. Economic reforms in 2016 which were aimed at slowing the growth of government spending and reducing barriers to foreign investment helped Brazil to emerge from its deep recession in 2016 to some extent. But the government spending growth pushed public debt to 70pc of GDP at the end of 2016, up from 50pc in 2012.

Despite some recovery in 2016, the country is currently experiencing a fiscal crisis and an increasing budget deficit, which is the largest-ever primary budget gap, according to Bloomberg.

As political uncertainty has diminished to some extent, leading to improved consumer and business confidence in 2017, the International Monetary Fund (IMF) expects Brazil to come out of recession before the end of this year. Predictions point to gradual, moderate growth of 0.20pc in 2017.

The economic recovery appears slow so far. Despite the slow growth, this year still represents an improvement from the last two dismal years. As for growth in 2018, the IMF has revised its forecast for 2018 at 1.5pc to 1.7pc. The gradual recovery will be supported by reduced political uncertainty, easing monetary policy, and further progress on the reform agenda. Brazil’s macroeconomic prospects hinge on the implementation of ambitious structural economic and fiscal reforms.

The UN annual report on global economic conditions revealed that as the need for structural reforms is retarding efforts aimed at a more rapid recovery, the economy may resume growth in 2017 at 0.6pc and growing 1.6pc in 2018.

The Euler Hermes reported that real GDP grew by 1pc quarter-on-quarter in January-March, the first positive rate since the fourth quarter of 2014. But on a year-on-year basis, GDP shrank 0.4pc for the 12th consecutive quarter. Based on first-quarter performance, it also expects GDP growth of 0.6pc in 2017 and 1.9pc in 2018.

According to the World Bank, the Brazilian economy will rise 0.3pc this year and 1.8pc in 2018, after decelerating steadily from an average annual growth of 4.5pc between 2006 and 2010 to 2.1pc between 2011 and 2014 and contracting by 3.8pc in 2015 and 3.3pc in 2016.

MEXICO

The Mexican $2.2trillion economy is the world’s 13th largest in nominal terms and the 11th largest by PPP. It is also the second-largest economy in Latin America. Per-capita income is roughly one-third that of the US.

The economy has become increasingly oriented towards manufacturing since the North American Free Trade Agreement (Nafta) in 1994 which marked a pivotal moment for the Mexican economy. Mexico has completely embraced free trade. As a result, exports of goods and services contribute to more than one-third of the GDP, up from just 11pc in 1980.

Over the last 22 years since the signing of Nafta, trade has become a critical part of Mexico’s growth strategy. Now its GDP is heavily dependent on exports. The country is highly dependent on the US, its largest trading partner and destination of 80pc of Mexican exports. It has become the US’s second-largest export market and third-largest source of imports. The US has been a net exporter of crude oil and petroleum products to the country since 2015. Exports to Mexico have been rising gradually over the last few years.

Development in Mexico is occurring at a rapid rate and private investments and businesses have also been increasing. As the manufacturing industry continues to increase production and output, the lack of infrastructure in Mexico has become a problem.

In order to tackle this problem, the government has initiated the National Infrastructure Programme 2014-18. This programme allocates $600bn of public and private funds to infrastructural development. This includes improvements to communication networks, energy, housing, health care, water, and tourism facilities.

However, the prosperity remains a dream for many Mexicans as the socio-economic gap remains wide and income distribution remains highly unequal. The global economic crisis of 2008 resulted in a GDP decline of more than 6pc. The economy has not grown above 2.5pc since 2012, falling short of private-sector expectations as President Pena Nieto’s sweeping reforms seem to have failed to bolster economic prospects.

Growth is predicted to remain below potential given the falling oil production, weak oil prices, structural issues such as low productivity, high inequality, a large informal sector employing over half of the workforce, weak rule of law and corruption.

In 2016, growth slowed down slightly to 2.1pc against 2.5pc in 2015. According to the World Bank, a challenging external environment of modest global growth and stagnant trade, gradually rising oil prices and diminished capital flows contributed to this reversal.

Published in Dawn, The Business and Finance Weekly, July 17th, 2017