After China, it is Brazil's turn to deliver bad news to the markets. 

The South American country's economy entered a recession after reporting two consecutive quarters of decline in growth.The recent announcement is a technicality: Brazil's economy has been suffering for some time now.   

The country was part of the BRIC – Brazil, Russia, India and China – grouping, which was supposed to usher in a new world economic order through prolific growth rates in the coming years. For some time at the turn of this decade, that seemed to be true in Brazil's case. The country racked up impressive growth rates on the back of a boom in commodities and energy exports. Even in the face of conservative analyst predictions, the Brazilian government maintained that it would achieve average growth rates of 4.5% in the coming years.  

But, Brazil's economy has unraveled since 2013. A complex cocktail of rising inflation, droughts and corruption scandals has engulfed the country, and it has become the worst performer among BRIC markets. (See also: Understanding The Risk In The BRICS.)

So, what happened? 

As China Goes, So Does Brazil   

Five countries – China, the United States, Argentina, Netherlands and Germany – are responsible for 45% of Brazil's exports. The country's latest spurt of growth, however, was largely driven by the Chinese appetite for Brazilian commodities.

Between 2010 (when its boom period began) and 2013, Brazil's exports to China more than doubled. In dollar terms, this meant that exports surged from approximately $20 billion in 2009 to $45 billion in 2013. The Middle Kingdom is Brazil's top trading partner and accounts for approximately 50% of its exports. 

The South American country supplied oil, soy beans and iron ore to the Chinese market and imported finished electronics and capital goods from China. Brazilian companies, such as oil company Petrobras and airplane manufacturer Embraer, have benefited from the transaction as they received major orders and funding from the fast-growing Chinese economy. In return, China made significant investments in Brazil. For example, the Chinese premier announced a multi-billion dollar investment deal (worth as much as $50 billion) this past May to overhaul infrastructure for smooth passage of Chinese goods through Brazil. 

The close trade relationship means that China's economic problems have a domino effect on Brazil's economy. Thus, China's commodity slowdown has shrunk profits at Brazilian companies. For example, revenues for Vale SA, the world's largest iron ore producer, declined by 29.7% due to slowdown from China in the previous quarter. Devaluation of the yuan has further slashed their profit margins making Brazilian exports to China less competitive. On an overall basis, this has resulted in a $12 billion loss so far in foreign sales for Brazilian companies. (See also: Chinese Slowdown Impacts Iron Ore Market.)

A Macroeconomic Mess And A Scandal

In 2009, Brazil's real was considered the most overvalued currency in the world. Then, a Goldman Sachs analyst referred to the “unprecedented amounts” of capital flowing into the country. The analyst wrote that increased government spending and expanding credit access would create problems for policy makers. 

In 2015, the situation is drastically different. 

The real is comparatively weaker and the slowdown in Chinese demand has negatively affected Brazil's macroeconomics. Last year, the country recorded a current account deficit that was 4.17% of GDP – its widest deficit since 2001. The deficit, which is the difference between exports and imports, meant that less foreign investment flowed into the economy. This resulted in a depreciation of the Brazilian real's value and made imports costly. (See also: Is a current account deficit good or bad for the economy?)

When she became President, Dilma Rousseff appointed a new finance minister who promised to create a budget surplus to 1.2%. However, their efforts have been hamstrung by a combination of factors including a prolonged drought and rising inflation. Brazil meets approximately 69% of its energy needs through hydroelectricity. A massive drought in its Southeast region has increased electricity prices and, consequently, the price of everyday goods. 

The President and her team have been further hit by a credibility crisis in the form of a massive scandal at Petrobras, Brazil's largest oil company. The scandal implicates a number of important members of the ruling party and has put brakes on investments in the oil and gas sector, which accounts for 13% of the total GDP. Investment ratings firm Moody's has already downgraded Petrobras' bonds in February. 

Effect On World Economy 

Brazil's current account deficit is an indicator of its relationship with the world economy. Its economy is financially integrated with those of its neighbors and with its top trading partners. But, an unequal relationship with its partners combined with a global depression may prolong the country's road to economic recovery. For example, China may be Brazil's biggest trading partner but the relationship is not reciprocal. The South American country does not even rank among the top ten exporting partners for China. With the exception of the United States, Brazil's major trading partners are also facing serious problems with consumer demand. 

The immediate prospects for the overall Latin American economy also don't look good. Earlier this year, the IMF predicted output contractions in the three largest economies in South America in 2015. Next year doesn't look too good either. According to the organization, the region will make a modest recovery to 2%. 

The Bottom Line 

Brazil's current slump is the result of a vortex of unfavorable events ranging from a drought to corruption scandals to economic uncertainty. That its trading partners and immediate partners are facing similar problems has not helped matters. Based on estimates, it might be a while before Brazil becomes a growth engine for the BRIC economies again.   

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