The Brazilian central bank’s decision to cut its main interest rate from 12% to 11.5% on 20 October has been cited as further evidence of the slowdown in the global economy. The argument goes that if one of the world’s biggest emerging markets is concerned about slowing growth, then the industrialised world really should sit up and take notice. Indeed, Brazilian GDP is now expected to grow by just 3.5% this year, far less than the 7.5% recorded last year, partly because of difficulties in the country’s key export markets but also because last year’s figure was buoyed by increased oil production.
There is a great deal of truth in this view but many analysts are missing the bigger picture in their relentless dash towards doom and gloom. The interest rate cut came after five successive increases and was prompted by the Banco Central’s desire to rein in the economy to dampen inflationary pressures. It is clear that Brasilia fears an economic slowdown and has now taken its eye off the perceived evil – inflation – to join in the western hemisphere’s battle against the four horsemen of the economic apocalypse: recession, stagflation, unemployment and collapsing confidence.
Yet it is interesting to consider exactly why inflation remains so high in so many countries. Brazilian prices increased by 7.3% in the year to September and price rises continue to trouble bankers, politicians and consumers. Every country has domestic explanations for this inflation: from higher energy costs in the UK to the impact of the oil boom in Ghana. Yet the main factor underlying global as opposed to domestic inflation is continued high demand for commodities in south and east Asia.
India and China, which collectively contain about 40% of the world’s population, have seen a couple of percentage points knocked off their growth figures, but their economies continue to perform very well by historic standards. Such growth is sucking in ever greater volumes of oil, iron ore, bauxite and other raw materials, as industrial revolution is accompanied by a consumer boom, for the middle classes at least.
Perhaps the most striking feature of their continued strength is the coal industry. Hundreds of thousands of people are employed in the Chinese and Indian coal sectors, both of which have been built on strong state price controls. However, rising demand coupled with limited deregulation has seen both countries increase their imports from Indonesia, Australia and South Africa, with emerging producer Mozambique soon to join this club. The fact that China, which produces 3.24 billion tonnes of coal a year – more than three times the amount of the USA – is being forced to import coal, shows that the global economy is enjoying a period of unprecedented demand for industrial raw materials, on the back of rapid economic growth in the two most populous countries.
The fact that Europe, Japan and North America are worried about a double-dip recession at such a time speaks volumes about the changing balance of global economic power. Inflation remains a problem but it is one that does not seem to be unduly worrying Delhi and Beijing at this time.