Brazil's economy grew 7.5% last year, the fastest annual gain in nearly a quarter century and more than twice as fast as the U.S. economy, which expanded 2.8% in 2010. In fact, Brazil's economy has been growing so fast - about 5% a year, on average - that some investors and economists are saying it has peaked and could be ready to backslide. (To learn more on Brazil, check out Investing In Brazil 101.)
TUTORIAL: Economics Basics
That would be quite an about-face, going from a top contender to a has-been in such a short period of time, but there are indications this is happening in Brazil right now. Here are five signs that, economically, Brazil may be on its way to becoming a country of the past.
1. Shrinking Gross Domestic Product (GDP)
GDP is an indicator of economic health representing the monetary value of all goods and services produced within a country during a specific time period, such as three months or a year. In Brazil, economists believe GDP growth is slowing and will fall to around 4.5% or 5% this year. That's as much as a 40% drop-off from last year's 7.5% GDP growth.
2. Worrisome Inflation
Inflation usually picks up as an economy heats up and expands because consumers want more of everything, from food and clothes to cars and houses. And that's just what's been happening in Brazil for more than a decade. There, inflation has gone from a record low of 1.65% in 1998 to 6.7% now - more than a 300% increase. Inflation can severely hinder economic growth when prices get so high that they discourage consumer spending, which is the main driver of growth.
3. Overdependence on Commodities
As a leading exporter of coffee, orange juice, sugar, soy, iron ore and other items, Brazil has been dubbed a "commodities powerhouse." So how could that be bad? Some economists are concerned Brazil is overdependent on commodities and too weak in other areas, like industrial production. In the long-term, that could result in a much slower overall economy even though Brazil does a tremendous amount of commodities business with the U.S., China and other countries. (To help you invest in commodities, read How To Invest In Commodities.)
4. Record-Low Unemployment
At a little over 6%, unemployment in Brazil is near record lows and less than half the historic high of more than 13% in August 2003. Surely, low unemployment is a good thing, right? Not necessarily. Although just about everyone would rather have a job than be out of work, very low unemployment is a major sign an economy has peaked, particularly in the case of Brazil. At this point, excessive government hiring, not a bonafide need for more workers in the general economy, is the main reason for record-low joblessness in Brazil.
5. A Potential Housing Bubble
Brazil is starting to look like the U.S. a few years ago, right before the housing crisis that sent our economy into a tailspin. Property prices are soaring, like in Sao Paulo, which has seen home prices nearly double in only a few years. Also, credit has become much easier to obtain, with the amount issued to the private sector nearly doubling since 2007 - and set to grow another 20% this year. Experts believe many new loans are being made to first-time borrowers who simply can't afford them - just like in the U.S. before the big crash.
The Bottom Line
There are many signs Brazil is at the top of its game economically with only one way to go - down. The question is how quickly and how far it will fall. A major crash like the U.S. had a few years ago doesn't seem likely because the Brazilian government saw what we went through and is already looking to curtail consumer credit. It has also been raising interest rates, a step governments often take to prevent a hot economy from overheating. Thus, a more likely scenario in Brazil is what economists call a soft landing, where the economy gradually pulls back to a more sustainable level of growth. (To learn more about emerging markets like Brazil, check out The Risks Of Investing In Emerging Markets.)