Belly-Up Brazil?

Since the World Cup ended in July, Brazilian economic activity has plummeted, inflationary pressures have intensified, and consumer and business confidence have collapsed. Just how sick is Brazil’s economy, and how will its malaise affect the outcome of the presidential election in October?

SAO PAULO – After years of impressive growth, Brazil’s economic prospects appear increasingly dim. Since the World Cup ended in July, economic activity has plummeted, inflationary pressures have intensified, and consumer and business confidence have collapsed, leading many economists to slash their growth forecasts for this year. So just how sick is Brazil’s economy, and how will its malaise affect the outcome of the presidential election in October?

At first glance, Brazil’s weak growth appears ephemeral, and President Dilma Rousseff should be well positioned to win a second term. Over the last 12 years, her Worker’s Party (PT) has delivered the country’s strongest per capita GDP growth in more than three decades; reduced income inequality with an extensive system of social transfers that reaches one-third of Brazilian households; and reduced formal unemployment to a record-low 4.5%.

But even a cursory look at recent economic data reveals that Brazil’s growth model may well be hitting a stagflationary wall. In fact, Brazil most likely experienced a technical recession during the first half of this year. And annual growth during Rousseff’s presidency has probably averaged less than 2% – the slowest for any Brazilian president since the 1980s, when the country began its transition from hyperinflationary basket case and serial defaulter to stable and increasingly prosperous middle-income economy.

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