Credit Cycles in the Economy and the Brazilian Case

Credit cycles (or leverage cycles) represent moments in the economy of a country when families and companies get indebted, in order to invest or to spend in different segments, which ends up positively influencing the level of the general economic activity, making the GDP grow. One of the ways to measure the leverage cycle of an economy is by dividing the volume of credit over the GDP. In Brazil we had a very significant leverage cycle between the years 2004-2014. On the Central Bank's website, we see that the level of credit (involving real estate credit, consumer credit, credit cards, vehicle financing, etc.) jumped from 25% in 2002 and 2003 to almost 54% in 2015. This great leverage cycle promoted the growth of the Brazilian economy in this period, becoming its main engine. 

However, one of the main problems with credit-driven growth of GDP is that this type of growth tends to be unsustainable in the long run. For, when families and companies find themselves heavily indebted, they begin to deleverage, having to pay off the debts in which they have incurred and causing a cooling off in the economy's cycle of aggregate expansion and investment. After 2014, Brazil experienced a period of deleveraging by families and companies alike, in response to the expansionist cycle of the previous period, influencing the subsequent fall in Brazilian GDP. 

As of 2016, we see a lower proportion of credit over GDP, indicating a lower willingness to get indebted on the part of the economic agents. At the same time, when consumption is contracted, entrepreneurs tend to invest less, since part of their installed production capacity starts to become idle. In 2020, we observed a countercyclical movement, substantiated by the increase in bank credit as a response to the COVID-19 pandemic. As a result, in December 2020, the volume of credit over GDP reached once more the level of 54%. Finally, how could all this be applied to the foreign exchange market? Simple, in expansion cycles, it becomes more profitable to invest in variable income, with a tendency for the national currency to appreciate against other pairs.

At FBS, clients can trade the pair USD/BRL through Cent and Standard accounts on both MT4 and MT5. For more information, see our trading instruments via the link: https://fbs.com/trading/specs/forex-standard

Author: Valdir da Silva

More by this author

Similar

24.05.2023 12:16 What to Trade in June

Hey guys, this is the last full trading week in May, and many forward-looking individuals like myself are already preparing themselves to seize whatever opportunities June may have in store. On this note, I will review a few commodities that have satisfied my quest for swing-trading opportunities in the coming month. Follow me!

23.05.2023 09:15 Will GBP Recover Now?

The Bank of England (BoE) has dramatically shifted its economic forecasts. They no longer expect a recession in the UK and have upgraded their growth projections. This year, the BoE predicts GDP growth of +0.25%, a significant improvement from previous expectations. Next year's forecast is even more optimistic, with a projected growth of 0.75%.

22.05.2023 10:27 Is the Euro Set to Recover Yet?

Here's the scoop: The Bank of England (BOE) is set to accelerate the pace at which it shrinks its balance sheet, according to one of its deputy governors. Currently, the BOE is unwinding about £20 billion of quantitative easing every three months. The goal is to reduce the stock by around £80 billion per year through active sales and maturing assets.

Latest news

01.06.2023 17:04 Gold and the Majors ahead of the NFP

Let's dive into the latest developments shaping the global economic landscape. Good news first: the threat of an unprecedented US debt crisis has receded, as US lawmakers passed a bill to raise the debt ceiling and avoid a catastrophic default. Phew! But don't pop the champagne just yet, because storm clouds are still looming. High inflation, rising interest rates, and sluggish growth are challenges that have yet to disappear.

01.06.2023 16:10 The Oil Market in the Month of June

Thanks to the incredible advancements in horizontal drilling and fracking technology, the United States has experienced a mind-blowing shale revolution. They've become the heavyweight champion of crude oil production, leaving Saudi Arabia and Russia in the dust. They even turned the tables and became net exporters of refined petroleum products in 2011.

24.05.2023 14:14 Gold’s Next Move Could Be Huge!

Let's dive into the world of gold. Currently, the price of gold, represented by XAUUSD, is stuck in indecision, hovering around the $1,975 mark. The market is anxiously awaiting two important factors: the release of the Federal Reserve's meeting minutes and the extension of the US debt ceiling.