The chart of the week is from Alec Lee, Senior Analyst for Latin America Research:
“I really like this chart for a few reasons. First, the chart tells an interesting story of what happened in Brazil over the past few years. The central bank tried to stimulate the economy by keeping interest rates low, despite rising inflation. High inflation led to a collapse in real wages. The collapse in real wages led to a decline in internal demand. Along with cyclical job losses, this drove private consumption falling by 4.2% YOY in 2016. The sharp fall in internal demand pushed the economy into a recession. The outcome is not a surprising to people that study the relationship between inflation, income, and consumption, though the depth of the recession took markets by surprise.
Second – again, in line with macroeconomic models – the sharp decline in internal demand eventually led to a collapse in inflation – which is what happens when there is no demand for goods. This led to a gradual increase in real wages, consumer confidence, and finally, a strong rebound in consumer demand. The market eventually self-corrected in the ways that economic models predict. I am now forecasting 2.7% private consumption growth for 2018, a sharp rebound from growth of only 0.7% in 2017.
Third, this chart tells a story that is broadly applicable. Companies that incorporated macroeconomic analysis to their decision-making could have protected themselves from some of the collapse of demand that began in mid-2014. History has many examples of central banks trying, and failing, to stave off a recession by resorting to the printing press. It almost never ends well, and risk mitigation strategies could have been put in place. Fast-forward to today, the cyclical recovery in consumption is taking hold, and we are advising clients to position themselves in Brazil to take advantage. This story isn’t just relevant to Brazil – it’s relevant to all markets that follow economic cycles, though the picture may not always be so clear.”
Have a question for Alec? Send him an email