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RIO DE JANEIRO — When Standard & Poor’s downgraded Brazil’s sovereign debt last week, the news had a certain feeling of inevitability here – just the latest in a seemingly unending streak of terrible economic news.
The real closed at its lowest value in 13 years against the U.S. dollar on Friday, at just $0.258. That’s a drop of almost 40 per cent from a year ago and 60 per cent from 2011 levels. Meanwhile the GDP is expected to contract by 2.4 per cent this year, the worst recession in 25 years. Other investment ratings are expected to follow S&P to junk status imminently. Inflation is higher than it has been since the turn of the century. The jobless rate nearly doubled in the first five months of this year.
It is hard to imagine the situation could get much worse – and yet there is a sense here that it almost certainly will.
Consumer demand is in free fall, which will only drive unemployment higher, in an ugly spiral. The real is expected to continue its fall, with some analysts predicting it will drop by another 16 per cent. And rather than a knuckled-down government attempting to navigate the crisis, Brazil has a gaping leadership vacuum and a political stalemate.
From the outside, Brazil’s accelerating implosion may appear remarkably swift: Until quite recently, the country managed to maintain its image as a robust emerging market, even though the data have been pointing to problems for some time.
And internally, although there have been five-alarm headlines for the past nine months, “people were doing fine until recently, despite the macro problems,” said Marcelo Neri, chief economist with the Center for Social Policies in Rio de Janeiro and a former top civil servant in the Ministry of Strategic Affairs, as the government scrabbled to keep a lid on unemployment.
But the unemployment rate, just 4.3 per cent in December, is now 7.5 per cent and predicted to hit nearly 10 by the end of the year. It is highest in the suburbs of Sao Paulo, Rio and other big cities, where layoffs have been heavy in manufacturing, and the oil and gas sector, in particular.
China’s hunger for Brazilian commodities such as iron ore was the primary driver of the last expansion cycle, but new consumers played a key role, too. Now they are deserting the malls.
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