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By HaleStewart May 1, 2016 10:50 am
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International Economic Week in Review: Are Brazil and Russia Exporting Their Weakness?

     Recently,  Fed President Brainard offered a fascinating insight into the reasons for slower U.S. growth. 

Even in the much larger United States economy, with imports accounting for a little over 15 percent of gross domestic product (GDP), spillovers can be quite strong, in part reflecting the international role of U.S. financial markets and the dollar. Since the middle of 2014, with a reassessment of demand growth in the euro area and subsequently in emerging markets and other commodity exporters, the real trade-weighted value of the dollar has increased nearly 20 percent. As a result, in 2014 and 2015, net exports subtracted a little over 1/2 percentage point from GDP growth each year, and econometric models point to a subtraction of a further 1 percentage point this year.

This analogy is easily expanded to the global economy, especially as the inter-connection between economies has increased over the last 25 years.  Currently, two economies -- Russia and Brazil – are in either a recession or depression.  It’s very possible that each’s slowdown is bleeding into the world economy, slowing overall growth. 

     First, let’s turn to Russia and look at overall GDP growth, inflation, interest rates, and unemployment:


GDP (top chart) has contracted for four consecutive quarters (remember, a depression is technically defined as 6 straight quarters of contraction).  While the inflation rate (2nd from top) has dropped form ~15% to ~7.75%, it’s still high, largely thanks to a massively depreciating currency (3rd from top).  As a result, interest rates are at 11%.  The official unemployment rate is ~6%.  However, this number isn’t credible given the length and depth of the contraction.

     A closer look at imports and exports shows how this weakness has been transferred to other countries:

Imports and exports have dropped at least 50% in the last two years.  That’s a massive decline in activity.

     Turning to Brazil, we see a similar picture:



Brazil is now in a depression, with 7 straight quarters of contraction (top chart).  Weak growth has led to increasing unemployment (2nd from top).  A massive drop in the real (3rd from top), led to an inflationary spike (4th from top).  Finally, to slow prices, the Brazilian Central Bank increased rates to 14% (bottom chart).

     And like Russia a large drop in trade shows how Brazil would export its weakness:

Imports (top chart) have declined over 50% while exports are down ~30%. 

     Brazil is the world's seventh largest economy while Russia is the 11th.  As President Brainard noted, developing countries have been responsible for most global growth since the end of the Great Recession.  It's difficult to see how the slowdown in each's respective exports and imports isn't bleeding into developed economies.

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