With a gross domestic product of 2.346 trillion, Brazil is the world’s seventh largest economy and the largest economy in Latin America. Until 2010, Brazil had been one of the world’s fastest growing economies; however, it is currently weighed down by multiple issues. These issues are a reflection of a declining growth rate. In 2014, the growth rate declined to 0.1%, following three years of moderate growth. The nation is also fighting against corruption, which has vitiated the investment atmosphere and dented the confidence of the private investor. As for the external sector, low commodity prices and slack demand have been the problems. Industrial production has taken a dip, and its current account deficit has widened from 2.1% of GDP in 2001 to 4.2% of GDP in 2014. Moreover, Brazil currently has high inflation and interest rates.
Brazil’s growth graph has been uneven, with periods of very high growth and then intermittent periods of slowdown, as well as dips. This is why despite achieving growth at a high rate, the average growth rate for Brazil over the 35-year period since 1980 is just 2.8%. These years have witnessed the Brazilian economy touch a 8% growth rate or higher. The growth rate has also plummeted to 4%. Nevertheless, despite the dips in growth on its growth journey, Brazil has achieved a lot. The period 2003-2013 witnessed steady growth and reduction in the levels of poverty and inequality existing in the country. According to the World Bank, “the income of the bottom 40% of the population grew on average 6.1% (in real terms) between 2002 and 2012, compared to a 3.5% growth in income of the total population”.
The composition of Brazil’s GDP reflects the dominance of its service sector, which composes 71% of its GDP. Its secondary sector contributes towards a little less than one-fourth of the GDP. Brazil’s agriculture sector has composed less than 10% of the country's GDP since the 1990s. According to the World Bank, in 2014 Brazil's GDP was derived from 5.6% agriculture, 23.4% industry and 71% service sector.
Brazil’s transition from a net food importer to one of the largest exporter of agricultural products in the world has been spectacular. Technically, since agriculture represents 5.6% of Brazil’s economy it cannot be called an agricultural country, but the importance of the sector is far beyond what statistics suggest. The country’s agricultural sector supports its fast-growing agribusiness sector, which has been an essential component of Brazil’s economic progress over the years. The agribusiness sector accounts for approximately 23% of the Brazilian GDP while accounting for 44% of its exports. (Read more on the global agriculture business, here: The 4 Countries That Produce the Most Food.)
Several factors have helped increase and diversify the production and exports from the agriculture and agri-business sectors. For example, modern technology and agricultural research, government policies funding agriculture and the development of new frontiers for farming in the Centre-West region since 1970s. Brazil’s production of agricultural and livestock increased significantly since the 1990s with the second thrust coming in around the millennium change in 2000. The agriculture sector engages approximately 20% of its labor force. Some of the most significant agriculture produce and exporting items are coffee, soybeans, sugar, beef, chicken, orange juice and corn. (For related reading, see: The 5 Countries That Produce the Most Coffee.)
Brazil has a well-diversified and well-developed industrial sector. The rate of expansion in industrial activity was at its peak while the process of import substitution was been carried out in the country.The initial focus of import substitution was on the non-durable consumer goods industry followed by the durable goods industry in the 1960s. The process came to a competition when import of basic raw materials and capital goods was taken up in the latter part of the 1970s. The whole import substitution industrialization (ISI) policy was exhausted by the start of the 1980s. The period after that witnessed compressive programs by the government to push further the development of its industrial sector. Brazil’s industrial growth was high in the 1970s and 1980s, and the 1990s witnessed a slower growth.
Brazil has advanced industries in the fields of petroleum processing, automotive, cement, iron and steel production, chemical production and aerospace. Other than these, the food and beverage industry is a very crucial part of the manufacturing sub-sector. The availability of cheap labor and abundance of raw materials has helped Brazil in its industrial development.
The overall contribution of the industrial sector towards the GDP gradually declined from the mid-1980s to mid-1990s, but it has remained more or less steady since the 1990s. Manufacturing, which is a significant subset of the industrial sector, contributes approximately 11% to the country’s GDP. The industrial sector employs around 15% of its workforce. (For related reading, see: Is Now the Right Time to Buy Brazilian Stocks?)
The services sector is the largest sector in Brazil contributing 71% to its gross domestic product. The decreasing share of agriculture and industry over the years was taken up by the service sector, which has contributed more than 50% of the country’s GDP since the 1990s. By this time, the service sector looked developed with sub-sectors such hospitality, financial services, IT BPO, retail sales and personal and professional services. The service sector is the biggest employer for the country’s workforce; in 2000 approximately 58% of the workforce was employed by the sector, it gradually increased to 60% by 2005. The service sector now employs 70% of the country’s workforce who are employed in various departments and services like hospitality industry, financial services, repair shops, information technology as well as bureaucracies at the national and local level as well as public utilities and special agencies.
The financial sector is by far the most important of the services industry in Brazil. The Brazilian banks showed great strength during the 2008 meltdown. The banking sector is the provider of huge funding for mega projects of mining and aerospace amongst other industries in the country. Other than financial services, travel and tourism are considered essential components of the service sector in Brazil. The direct contribution of travel and tourism to Brazil’s GDP was around 3.5% in 2014, and that number is expected to rise in the coming years. This subset includes the revenue generation by hotels, travel agents, airlines, restaurants and other directly supported activities. The overall revenue from the services sector grew at a nominal rate of 6.6% in 2014, slower than the revenue growth of 8.5% in 2013.
The Bottom Line
Brazil is going through a rough patch; the IMF projects its economy to contract by 3% in 2015 and further 1% in 2016. Brazil needs to adopt urgently reforms with an eye on the future growth trajectory; raising productivity, competitiveness and investment are all crucial for a successful growth rate in the future. (For related reading, see: Emerging Markets: Analyzing Mexico's GDP)