The Brazilian economy shrank by 1.9% in Q2 and revised figures for Q1 put the contraction at 0.7% rather than the initial estimate of a 0.2% contraction. Consequently, the economy is now officially in a recession. Brazil exports a lot of raw materials to China and the slowdown in the Chinese economy could prolong Brazil’s recession. Part of the reason for Brazil’s slump has been subdued global demand for raw materials due to fairly anaemic demand for finished products as the global economy limps towards better times.

Brazil is battling inflation of 9% which is running at twice its target rate. One weapon being used to tame inflation (evidently with only marginal success) is interest rate policy with the central bank interest rate standing at a whopping 14.25%. This gives a nominal premium of about 5% on savings when inflation is stripped out. However, the Brazilian Real has slumped against the Dollar dropping from 1.55 in July 2011 to stand at 3.59 Brazilian Reals to the Dollar currently (having started the year at nearly 2.7), so the purchasing power of savings in foreign countries has also slumped.

Central government is trying to curb high debt levels with austerity measures which also stymied economic growth, of course. This has seen taxes increased and benefits fall, making life harder for Brazilian citizens. Consequently, household spending has seen a fall of 2.1% over the quarter and construction output has dipped by 8.4%. Year-on-year, the economy fell by 2.6% in Q2.

Unemployment, unsurprisingly, is increasing having risen from 5.3% to stand at 7.5% in July, a five year high.

Analysts are predicting that it may take until 2017 until growth returns to the Brazilian economy, but this could be delayed if China experiences a marked slowdown in its economy.