Unemployment in Brazil typically rises at the start of each year, a ritual accepted in that part of South America in a way that it isn’t here (residual seasonality). In 2013, for example, from December 2012 through March the rate rose by 1.1 percentage points. The following year, from December through March, it increased by 1 percentage point. This year, 2017, was supposed to be a year of recovery after devastation “unexpectedly” visited the Brazilian economy. As is usual, the unemployment rate rose in the first three months of this year, but by 1.7 percentage points.
Worse, when 2013 seasonality was in full swing, the unemployment rate ended 2012 at just 6.9%. There were, according to the IBGE’s updated PNAD National Household Survey, 6.65 million Brazilians unemployed for the 90.3 million at work. At the end of 2016, the unemployment rate stood at 12%, with 12.3 million unemployed and slightly fewer working (90.2 million) compared to four years prior. After the seasonal rise, the total official estimate of those Brazilians out of work jumped to more than 14 million, almost double the number from just two years ago at the seasonal “peak” in March 2015.
As is also quite often associated with these sorts of circumstances, Brazil has been rocked by political and social unrest. The latest was a nationwide strike not two weeks ago, causing Brazil’s largest cities to partially shut down and several of them to descend into riots.
Dissatisfaction over the state of Brazil’s economy has been rampant ever since the summer of 2013. It was initially triggered by an increase in the bus fare, another of Brazil’s more regular economic features. A legacy of the country’s experience with hyperinflation decades before, The Real Plan of 1994 called for indexing the prices of almost everything. The private bus system was required to obtain government approval for rate increases.
In 2012, there was none after a 10 centavo increase in 2011. The economy that year was uncertain, and the reasons for it even more uncertain. Brazil had been pounded by the Great “Recession” several years earlier as practically every other country around the world was, but it had escaped into sharp, rapid recovery that appeared to be the usual EM style in keeping with the pre-crisis landscape of so many economic “miracles.”
The sudden lurch in 2012 was, to say the least, hugely disconcerting. The precrisis period turned Brazil into a modern economy, pulling an estimated 40 million out of poverty. But it wasn’t yet a solidified state, like China the country depended too much on external factors as its growth engine. It is much more than an understatement to say that a slowdown in the United States that year and a re-recession in Europe were not welcome developments.
By early 2013, however, conditions appeared to be improving. That was the international consensus among economists and policymakers, for whom the mantra of “if it’s not contracting it must be growing” always applies. For Brazil, it appeared to be nothing more than a temporary stumble before resuming its miracle status. The Rousseff government, after first considering rejection, would eventually approve a 20 centavo increase in the bus fare (about 7%), however it would be delayed until June rather than as usual coming in January or February just to be sure.
At the outset of 2013, Dilma Rousseff, Brazil’s relatively new President, was incredibly popular. Taking office on New Year’s Day 2011, she had seen the country through its more recent turmoil and having apparently succeeding in doing so. Her government was the first in 2011 to utter “currency wars” as a charge against the so-called developed world, committing its central bank to reverse swaps against the dollar so as to push the real as best as possible lower.
Opinion polls in early 2013 showed her with dictator-like 92% support. A separate poll from January 2013 recorded the same 92% optimism, as that proportion of Brazilians was expecting the economy to improve or at least remain stable for the year. Instead, there was massive protests all over the country in June over bus fares.
It wasn’t, of course, purely about the cost of transportation. There was a palpable uncertainty behind it all that though Brazilians may have been outwardly confident there was no shaking off tension and unease. They surely wanted to believe economists, as all people in these circumstances do, but also a realization that Brazil’s very economic security rested on a knife’s edge rather than the broad foundation of prosperity they had thought collectively achieved in the two decades since the inflationary disaster. The expansion especially in the middle 2000’s seemed to be destiny, but also too good to be true.
In truth, Brazil had lost economic momentum in 2011 and never really got it back. The “dollar” events of that year were dispositive in every case; from Europe to the US to China to grave misfortune of Brazil. Because of that precarious state, the initial “rising dollar” stages during the “taper tantrum”(a plunge in the real) that just happened to occur coincident with the bus fare riots that summer were a genuine monetary powder keg combining all the elements of politics, economics, and finance. But compared to what followed, it will rate as barely a footnote in history.
The “rising dollar” has utterly devastated the Brazilian economy, and most Brazilians don’t seem to know why. This is not a unique shortcoming, for most people around the world experience the same confusion over varying degrees of the same economic disaster. Brazil has taken the misfortune of being the worst for it, perhaps the most extreme example of what textbook monetary destruction can unleash upon an economy.
This year was supposed to be “reflation”, the global rebirth of growth and maybe even a little more like normalcy after the “transitory” effects of whatever it was dissipated in the Hong Kong/Tokyo “dollar” markets on February 11, 2016. For Brazil, there might even be some optimism given every expectation for symmetry – the worse it was on the way down, the more pronounced on the way up. That’s how it went in recovery from the Great “Recession”, where the economy, particularly Brazilian industry, was hammered but in just 16 months seemed to be right back at it.
But industry bottomed out in February 2016 (no coincidence the timing) and rather than rebound like all past experience industrial production has continued to scrape along the bottom. It’s as if this vital engine of Brazil’s whole economic system just shrunk.
The rest of the economy is acting as if that was the case; there is only contraction still throughout it in broad-based fashion. Retail sales fell 3.2% in February 2017, the latest data, after contracting by 7% in January. They have declined for 23 months straight, and 24 of the past 25 dating back to early 2015 – around the time Brazil’s employers began to finally cut back on labor after being sustained (by faith?) during the rest of 2013 and all of 2014 while the industrial base was being pulled back.
Even GDP remains negative at the end of 2016, declining 2.5% in Q4 for the 11th consecutive quarterly contraction. Things are better now, but what does that really mean?
There is a harsh reality to Brazil’s tragedy, one that should be entirely too familiar to countries and economies far away from South America. These monetary-driven events are not like normal business cycles where the economy falls for a time and then gets right back up and resumes normal operation as if nothing ever happened. Each time, the economy goes down it doesn’t get back up; there is no recovery, no reflation. The common theme in all of it is the “dollar.”
Brazil is an extreme example but still an apt one nonetheless. Here in the US, the “rising dollar” knocked growth rates down to in some places (GDP) the barest of minimums. And rather than rebound from it as seems to be every mainstream expectation, especially under “reflation”, there is left only more confusion, misapprehension, and growing unrest.
Global “reflation” proceeds under false pretenses. These are the very same that once convinced the Rousseff government to go ahead with a 20 centavo increase in bus fares triggering nationwide strife that continues on almost a year after Rousseff herself was impeached and ultimately removed. Economics used to be called political economy for a reason, because in times like these there is no separating one from the other. In fact, the deeper or longer (or in Brazil’s case, the deeper and longer) stagnation goes the more inseparable they become.
It’s not a liquidity trap in the conventional sense, rather it is one where there is none.