Europe has dominated the financial scene for more than two years, and although policy makers have scheduled six summit meetings for 2012, many experts expect to see little more than continued bond issuance, not the structural changes that the markets believe are necessary to correct the problems at hand. More of the same is not a good recipe for a stable global recovery, especially for emerging economies like Brazil that have witnessed dramatic growth for the past decade.
The impact of the European malaise on Brazil does not manifest itself merely in reduced export trade for the South American leader. Exports to the Eurozone exceed $42 billion on an annual basis, but this figure is barely 2% of GDP for the nation. A slowdown in Europe has an indirect effect that is amplified for emerging countries since other major countries reduce their consumption as a result.
Brazil primarily exports commodities that fuel the productive engines of the world. The graphic below illustrates the interdependencies that prevail upon Brazil’s prospects:
Various data are presented for Brazil for the past two years – ETF indexes are correlated for Brazil, Europe, and the United States in the upper portion, while the bottom chart depicts the “USD BZR” currency relationship. If the “EUR USD” currency pair had been added, its path would have mirrored the green line in the top portion of the diagram.
As you can observe, the Brazilian stock market has also mirrored the green line for Europe to a great extent, but began to separate and go negative in 2011. Last year can be termed the “year that never was.”
The U.S. central bank expanded the money supply in the first six months, an attempt to fuel the domestic growth engine and lead a global economic recovery. When this attempt stalled in May and the issues in Europe grew more severe, financial markets the world over reacted negatively, particularly so in Brazil, losing more than 30% in market valuations before mounting a small recovery over the remainder of the year.
Government officials in Brazil responded by lowering interest rates and reducing taxes on investments, actions that were initially criticized but have since proven to be the right moves at the time. Growth may slow to 3% in 2011, but the foundation is there to allow slight improvement to 3.4% in 2012. Adjusting interest rates took pressure off the appreciating Real and returned its relationship with the Dollar back to where it was nearly two years ago. A Forex education is not necessary to understand that a weaker currency should create more demand for exports in general.
Brazil’s economy has been a shining example of success, surpassing the United Kingdom to assume the sixth position, with sights set on France to catapult to fifth and beyond. Economists have joked that the nation’s financial prowess has finally matched its ability on the football pitch, but beating Europe on the playing field of economics will require a deft touch in the months ahead. The Dollar is continuing to strengthen versus most all global economies. Some industry experts are already forecasting another 20% depreciation in the Real in 2012.
A local chief economist has warned that “Nothing is bad enough that it can’t get worse.” If the current recovery stays in tack and is not derailed by European machinations, then prosperity may prevail. Time will tell.
Tom Cleveland is a market analyst for Forex Traders and has more than 30 years of experience in executive management, corporate governance, and business development.