BRAZIL'S BUST

When Rio de Janeiro won the rights seven years ago to play host to the 2016 Olympic Games, Brazilians were eager to trumpet their economic success story to the rest of the world. While major industrial countries were still reeling from the effects of the global financial crisis and the worst recession since the 1930s, Brazil's economy was growing at an impressive clip. Demand for its oil, minerals and agricultural exports seemed insatiable, unemployment fell to a record low and an increasingly affluent middle class flooded into new upscale shopping malls.

Even bullish officials knew that rapid, Chinese-type expansion – 7.5 per cent in 2010 – was unsustainable. But they looked forward to years of sturdy annual growth of 4 to 5 per cent, as Latin America's largest economy finally lived up to its vast potential.

Today, on the eve of the Games' opening ceremonies and what was supposed to be Brazil's coming-of-age party as a rising world power, those dreams have been shattered.

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The first cracks appeared when the air quickly leaked out of the global commodities balloon, once the Chinese economy slowed dramatically. No exporter was hit harder than Brazil, whose trade with the world's most voracious consumer of resources had soared to more than $80-billion (U.S.) in 2013 from about $2-billion in 2000.

The steep drop in oil, iron ore, sugar and other export prices exposed Brazil's heavy reliance on a single trading partner as well as its failure during the good times to capitalize on the Chinese windfall by making the economy more competitive and resilient.

Mix in stubborn inflation of about 9 per cent, two years of declining business investment, a double-digit jobless rate (seven million jobs have disappeared since early 2015), fragile public finances, labour unrest and political paralysis amid a deepening corruption scandal, and the foundation was laid for years of misery.

The recession

The economy remains mired in a worse slump than during the darkest days of the Great Depression, with little prospect of a quick recovery.

You know the situation is bleak when analysts looking for any ray of sunshine tout the fact that the economy is no longer falling quite so fast. After plunging 5.4 per cent in the first three months of 2016 from a year earlier, Brazilian gross domestic product (GDP) likely shrank by about 3.5 per cent in the second quarter. That marks eight consecutive quarters of decline, a record unmatched in a country with a long history of economic failure, political crises and frequent booms and busts linked to commodities.

For the full year, even a post-Olympics investment boom or the sudden eradication of the Zika virus – both highly unlikely – wouldn't be enough to pull the economy back into the black. Economists forecast a decline of 3.7 per cent, nearly matching the slide in 2015.

Most economy watchers expect no recovery before 2018, as the government seeks to impose some post-Olympics budget austerity and the central bank keeps interest rates high to cope with inflation. The current benchmark interest rate is an investment-dampening 14.25 per cent.

Still, the worst may be just about over, if the actions of wealthy investors are anything to go by. Attracted by depressed asset prices and buoyed by the prospect that a more pragmatic government under acting president Michel Temer will actually tackle the country's fiscal mess, astute Brazilians – and a growing number of foreign acquisitors – are hunting for bargains in their beaten-up economy, instead of shovelling their money into foreign markets.

The Olympic effect

Most Olympic hosts can typically count on at least one positive amid the huge cost overruns, heavy debts and other headaches associated with the world's costliest sports extravaganza: a surge in economic activity stemming from massive public spending on construction of sports venues, housing, transportation and other infrastructure in the runup to the Games.

But in the case of Brazil, the $1.5-trillion-plus economy is simply too large for any Olympic spending or earlier World Cup outlays to make any sort of meaningful impact.

"We do not expect them [the Games] to provide a material boost to economic activity," was the blunt assessment of Capital Economics' emerging market watchers.

The investment "was just too small to generate a significant economic dividend …given the sheer size of the economy," Alberto Ramos, a senior economist with Goldman Sachs, said in a note to clients.

But improving business and consumer confidence point to a potential post-Olympics economic recovery, Mr. Ramos said. And that confidence could be given a major boost if the Games run without a hitch and Brazilian athletes do well in the medal count.

"As the country welcomes thousands of athletes and visitors and cheers the local favourites, it silently hopes that the soaring Olympic spirit will also help lift the animal spirits of the Brazilian economy and bring it back to the podium reserved for the top performers," Mr. Ramos wrote.

Commodities and trade

When Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, and his analysts set about examining about a century's worth of Brazilian economic data, they reached a simple conclusion. Forget about its industrial champions, the rapid growth of its services sector, or its history of government intervention and endemic corruption. When it comes to Brazil's fortunes, it's always about global demand for its vast and diverse natural resources.

So no one should be surprised by the country's precipitous decline in the midst of battered prices for oil, iron ore, sugar and other key exports.

"What our work shows is that over the last 100 years, there's been only one driver of growth, and that's commodity prices," says Mr. Sharma, author of The Rise and Fall of Nations, a new study highlighting the good, the bad and the ugly among various countries.

There is no evidence that expansion of the domestic consumer market can effectively counter the adverse impact of lower commodity export prices, he says. "I'm still waiting for someone to provide it."

He places the country firmly in his "ugly" class, but notes that it has made some positive strides while battling its myriad troubles, more than a few of them self-inflicted.

For a nation so dependent on commodities, Brazil made the mistake of shutting itself off from much of the world, Mr. Sharma writes in his book. In the first 15 years of this century, its rivals inked dozens of deals designed to foster freer trade. Brazil reached only two.

The government is "at least starting to rethink policies that shut it off from the world," Mr. Sharma writes.

"Brazil has not changed course enough to rise out of the ugly class, but it has lifted itself off the bottom," he says. Credit for that shift goes mainly to the rapid decline in a once-overvalued currency and "the sudden evaporation of hype for what some global commentators had started calling 'God's own country.'"