Investment Contrarians

Will the U.S. Economy Follow Brazil’s Rapid Drop in GDP Growth?

By for Investment Contrarians |

U.S. Economy Follow Brazil’s Rapid Drop in GDP GrowthWith the world economy slowing, it is possible that we could see a global recession in 2013. Gross domestic product (GDP) growth for many countries has significantly declined in the third quarter of 2012. While some countries experienced an increase in GDP growth in the first part of the year, it’s quite apparent going into the third quarter that, for most nations, the estimates were far too high.

One recent example of the economic decline that’s occurring in various nations around the world is Brazil’s mere 0.6% GDP growth in the third quarter, compared to a survey conducted by Bloomberg of 54 economists that had estimated a 1.2% increase in GDP growth. (Source: “Brazil GDP Growth at Half Forecasted Pace as Investment Dives,” Bloomberg, November 30, 2012.)

Two interesting points are apparent. First, the significant decline in Brazilian GDP growth increases the possibility of a global recession in 2013; and second, the country’s economy has some similarities with America that we should be cognizant of.

In America, retail sales, including car sales, have remained somewhat resilient, even though the economy has been weak. In Brazil, the situation is quite similar, as retail sales increased 8.5% in September from the same time in 2011. Yet industrial production in Brazil fell 2.8% in the third quarter, as compared to the same quarter in 2011. (Source: “Brazil GDP Growth at Half Forecasted Pace as Investment Dives,” Bloomberg, November 30, 2012.)

While America certainly has larger issues, our third-quarter GDP growth was 2.7%, versus an annualized GDP growth rate for Brazil of only 2.4%. A big issue for both countries is not the willingness of the consumer to spend—as we’ve seen that if people have money, they will buy products—but it’s the lack of investment by corporations that’s keeping the economies restrained.

Obviously, every country has its own systemic and structural issues to deal with. But we need to be aware that GDP growth worldwide is slowing down. There are massive issues to be resolved, and even though many countries have taken on huge levels of stimulus spending as well as monetary policy easing, a global recession in 2013 cannot be ruled out.

The scary truth is that considering the massive amounts of money spent worldwide to stimulate each individual country’s economy, there is very little GDP growth around the world. If the world economy is lacking GDP growth after so many stimuli, how much faith can we put behind any new stimulus packages to prevent a global recession in 2013? I think very little.

Looking at Brazil as an example, the only data point that has really gone up is prices. Inflation is running at approximately 5.4% in October when compared to 2011 levels, well above the Brazilian government’s target of 4.5%. It appears the attempts to prevent a global recession might ultimately just end up creating inflation with relatively low real GDP growth.

I believe that unless real structural changes are made to the economy, the impediments restraining GDP growth will remain, regardless of the amounts of stimulus spent by governments. Giving away cheap money will only cause serious unintended consequences that will result in far more problems down the road for everyone involved.

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