Thursday, July 12, 2012

Brazil and China

In addition to the fiscal cliff, there is another item rising toward the top of the “Checklist for Pessimists,” based on what I heard over the past couple of days in my meetings with our accounts in Los Angeles. It is that the global economy is slowing not only because Europe is in a recession, but also because emerging economies are slowing significantly. They are doing so not just because their exports to Europe are slowing. Many also have home-grown problems. Let’s have a look at the latest developments in Brazil and China:

(1) Brazil. Brazil’s central bank board members voted unanimously on Tuesday to cut the benchmark Selic rate by a half-point to 8%. In a statement almost identical to ones issued at their two previous meetings, policy makers said “fragility” abroad is having a “disinflationary” impact in Brazil. It is the eighth straight cut since the rate peaked at 12.5% about a year ago.

Retail sales volumes dropped 0.8% in May, the biggest monthly decline since November 2008, government data showed Wednesday. Brazil’s merchandise exports plunged 18.3% y/y in June. Industrial production was down 5.7% y/y during May, to the lowest level since November 2009.

(2) China. The good news is that inflation is moderating significantly in China. That is also the bad news. June’s CPI rose 2.2% y/y, down from a recent peak of 6.5% and the lowest since January 2010. That’s good because it should boost the purchasing power of Chinese consumers as wages rise faster than prices. On the other hand, the decline in the PPI inflation rate is more worrisome since it suggests that China’s industrial economy is slowing. The PPI fell 2.1% y/y during June, down from a recent cyclical high of 7.5% July 2011. That’s the fourth consecutive negative reading and the lowest PPI inflation rate since November 2009. The PPI tends to be one of the better indicators of Chinese economic growth and suggests that it is slowing significantly.

Today's Morning Briefing: Rebel Without a Cause. (1) City by the Bay. (2) City with a cliff. (3) CBO sees fiscal tightening causing mild recession next year. (4) Fiscal cliff concerns already weighing on economy say FOMC members. (5) Another kick down the road? (6) Simpson-Bowles is the solution. (7) Obama’s “Chickie Run.” (8) Home-grown problems depressing Brazil and China. (More for subscribers.)

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