Brazilian contraction

By Joe Leahy



Latin America`s largest economy confirmed last week economists' worst fears – that it is suffering its deepest recession in more than a century. The economy contracted 3.6 per cent in 2016 after plummeting 3.8 per cent in 2015. It is now the same size as in 2010, the last year of the great Brazilian economic boom of the first decade of the century. 

 

Economists and politicians say there are signs of bottoming out. But any recovery is likely to be lacklustre at about 1 per cent. For the government of President Michel Temer, whose credibility is under siege from corruption investigations into Petrobras, the state-owned oil company, this year is show-time. He must start to turn around growing unemployment before 2018 when the country faces its next elections, or he and most of his coalition allies will be out of a job come 2019.

Complicating the picture for Mr Temer is how to keep his coalition allies happy in a time of austerity. There have been rumours that some of them would like to have a say in the appointment of a new chief executive for Vale, the world`s largest iron ore miner, with the imminent departure of the current boss, Murilo Ferreira, in May.

The miner`s biggest single shareholder is a group of government pension funds. In Brazil, such political appointees have traditionally been used for pork barrel politics – such as directing construction projects to the constituencies of their patrons in congress – or worse, for outright corruption. But the company says it is using an executive search firm to help find its new chief. Mr Ferreira has said he did not entertain any political affiliation during his six years at the helm.

Further north, officials on both sides of the Mexican border are ratcheting up the rhetoric ahead of tough talks over the future of the North American Free Trade Agreement. US commerce secretary Wilbur Ross has said the talks would get underway towards the end of 2017 and could take a year. Mexico wants the matter resolved more quickly – ideally by the end of this year - to remove uncertainty for investors.

Mexico is also talking tough over a key part of the election platform of President Donald Trump: requiring a wall to be constructed on the border. Mexican senator Patricio Martínez says parts of the current border – 85,000 hectares in the states of New Mexico and Arizona – have been mistakenly claimed by the US. Any wall should acknowledge the error and be built along the actual border, he says.
Quote of the Week
“We are going to be true [to Brazil] here … This will not be some Miami-style fake Spanish village” Alexandre Allard, French luxury hotel entrepreneur, on his plans to convert São Paulo`s sprawling, derelict Italianate style Matarazzo Hospital into a landmark luxury hotel and centre for creative industries.
Chart of the Week
The Brazilian  economy
 

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