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Opinion: Rousseff Dismantles Brazil's "New Middle Class"

02/13/2015 - 08h59



The beginning of Dilma Rousseff's second term heads towards the end of the process she started in her first term: dismantling the so-called "new middle class" ("new class C").

It is a step back that will mark Brazil and the president's biography. Recession with high inflation conspire to get the job done.
Entrepreneurs already speak of a GDP decrease of 2% this year, with rising unemployment, and inflation above 8%.
On the one hand, "Null" GDP last year, paralysed investments, Petrobras [scandal], abrupt drop in consumption and likely rationing of water and power supply will drag the economy down.
On the other hand, it is a classic among Brazilian companies to cut costs (firing people and reducing production) during crisis and trying to maintain profit margins, even at the cost of selling less.

The competition from imported goods that prevents this behaviour will be compromised due to a more expensive dollar, which makes it more costly to buy similar products from abroad.
The persistent inflation is here to stay for a while, now inflated with energy, fuel, and other more expensive rates. To pull it down, there will be more sacrifice in terms of growth.

Brazil's main achievement in the last decades - the rise of more than 40 million people that entered the ranks of the so called new middle class (today, 54% of the population) - will be the first major victims of this process.
Last Datafolha poll gives a clue: the president's popularity rating nationwide fell 19 points from December to February. Among all regions, in the Northeast, a Rousseff and Lula stronghold, it went down even more: 24 points.
The Northeast of the country was the locomotive of the social mobility during both Lula terms. The region grew at a "Chinese" rate for several quarters before Rousseff's administration, taking millions from misery.
However, even with all the "boom" years of Lula's administration, Brazil remains a poor country: 67% of households have a monthly income of up to US$ 770.

If inflation happens to corrode any buying power (mainly food, where the bulk is spent) it will destroy the budget of two-thirds of the population. That is what is under way.
The hell, to which Rousseff got herself in terms of popularity, reflects the hell she put those who got used to social mobility year after year, until the middle of her first term. That is over.
Datafolha poll shows panic among the surveyed: 62% expect more unemployment (compared with 39% two months ago) and 57% anticipate their buying power will fall (compared with 34% in December).
It will be devastating for consumption; the feeling that things tend to get worse, affecting production, employment and the entire capacity the economy has to expand.
Especially when things are worsening, as they already are. It tells us a lot that, in January, the net withdrawals (deposits minus withdrawals) from savings accounts have been the biggest since 1995, a total of US$ 1.95 billion. Families are lacking money.
The situation would have been bad enough if not for the fact that Rousseff has ruined the economy "underground".

Now, the president needs to cut spending and increase taxes to save about US$ 23.4 billion in 2015 and, at least, regain some credibility.
It is going to hurt. It is worth watching again one of the major campaigns the Workers' Party (PT) has done in the elections. Visionaries.


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