Broken lever

BRAZIL does not look like an economy on the verge of overheating. The IMF expects it to shrink by 3% this year, and 1% next. (The country has not suffered two straight years of contraction since 1930-31.) Fully 1.2m jobs vanished in the year to September; unemployment has reached 7.6%, up from 4.9% a year ago. Those still in work are finding it harder to make ends meet: real (ie, adjusted for inflation) wages are down 4.3% year-on-year. Despite the weak economy, inflation is nudging double digits. The central bank recently conceded that it will miss its 4.5% inflation target next year. Markets don’t expect it to be met before 2019.

If fast-rising prices are simply a passing effect of the real’s recent fall, which has pushed up the cost of imported goods, then they are not too troubling. But some economists have a more alarming explanation: that Brazil’s budgetary woes are so extreme that they have undermined the central bank’s power to fight inflation—a phenomenon known as fiscal dominance.

The immediate causes of Brazil’s troubles are external: the weak world economy, and China’s faltering appetite for oil and iron ore in particular...

via The Economist: Finance and economics Business Feeds

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