'It's the Economy, Stupid' - The Middle Class

Good morning to you, one....and all (or is that a touch presumptuous, over confident?).  The week is rushing headlong toward its conclusion and the arrival of the weekend (for those who have Saturday and Sunday as their weekend) and I thank you for taking the time to drop in on my Blog during your no doubt busy schedules!  You are very welcome.

The main news from late yesterday/overnight revolved around the economy and the Brazilian Central Bank's move to raise its benchmark Selic rate by 0.5% to 9.5%.  The action is part of the Bank's effort to control inflation, as it makes credit more expensive and should, therefore, curb consumption....in this country where its recent economic boom was built on exceptional consumption drives that resulted, in large part, from up to 40 million people being raised from poverty into the Brazilian middle class (explained below) and, for the first time, began believing they could afford consumer durables.  As we discussed, yesterday, the result of the explosion in would be consumers, tied to exceptionally high prices (in many cases amongst the highest in the world for given commodities, if not the highest) led to Brazil goring itself on credit; with household debt as a percentage of disposable income reached a record 44.8% in June of this year according to the ratings agency Moody's.

It is essential for Brazil to manage its inflation rate within the stated target range and demonstrate the fiscal probity demanded by such as the IMF and which the market needs to see if confidence is to be restored in the country as an economy in which to invest; and Brazil is in desperate need of foreign inward investment.  It is equally essential to do so in order to ease some of the immense monetary pressures bearing down on the middle class (see below).

The 12 month inflation rate eased during September, falling from 6.09% in August to 5.86%, the lowest for a year.  That is positive news, but the vast majority of Reuter's polled economists assess the end year rate at still in the 5.8+% region.  If correct, that would mean Brazil ending the year above its target inflation number of 4.5%; though that number is bracketed with a 2% tolerance range.  Some leading commentators and economists believe that the Bank's benchmark rate will have to be 11 or 12% if it really intends to hit its 4.5% inflation target and most do see the Selic moving into double figures.

In broader terms, the Government and the Bank have to regain control of key variables, such as inflation, and relaunch the economy from its current low growth stagnation in order to be able to deliver on the promises made to the people of Brazil about improvements in quality of life, social policies and social services made during the nation wide mass protests in June of this year.  Failure to deliver on promises made to the growing middle class, as well as the poor, risks significant consequences, which we shall discuss in future posts.  I want to focus on the middle class for the remainder of this post.

Perhaps the first question should be, why?  Why talk about the middle class or any class categories.  Firstly, we almost all do, in just about every country (the lot of the US middle class was key to both campaigns in the last US Presidential election) and governments' economic and social policies change as social mobility alters the percentages of the population in each category (if they move); as is the case in Brazil now.

As all commentators point out when starting any discussion of the Brazilian middle class, one must first be clear as to the definition of that category.  The Strategic Affairs Secretariat (SAE) defines middle class in Brazil as households with per capita monthly incomes of R$291 ($145) to R$1,019 ($500); ie R$3,492 to R$12,228 a year.  By this measure, around 52% of the population are now middle class.  In the UK, as a comparison, recent studies show that the average income for the the middle classes is 37,000 pounds a year (R$111,000 a year) which, in a household of two parents and two children means 9.250 pounds per head (R$27,750).  Members of the middle classes in the UK were also shown in the studies to have an average of 10,000 pounds (R$30,000) in savings.

While many UK social scientists currently employ a category variously titled ´struggling middle class´, the more standard or common understanding of middle class is that one is a salaried worker who probably owns his/her own home, has gone through tertiary education and maintains some savings; in days gone by, it was termed, 'having home, white goods, electronics, car and being comfortable', which translates to owning one´s home, owning standard domestic appliances or consumer durables (kitchen and entertainment items etc) a car in reasonable condition, not running out of funds in the latter part of each month and being able to sustain some savings.  The numbers in the paragraph above suggest that there is no real comparison between the meanings of middle class in the UK and Brazil.....

For the new members of the Brazilian middle class, however, the feeling they derived from joining that class and perception of his/her relationship to the economy and place within it might, perhaps, equate more closely to the perceptions of the UK middle class than the numbers suggest.  To be lifted from poverty to the SAE´s definition of middle class, certainly to the upper reaches of it, may alter one´s perception of place within society/the economy and one's expectations of society and the economy; as you plan to buy your first car and buy new consumer durables.  Self perception and hopes/expectations for the future might well bear some relative comparison with those of the UK middle class.  In viewing the population as a whole and the recent jump in upward mobility between poverty and the Brazilian middle class, one may better understand and perhaps accept the government´s employment of the term.

When I arrived here, over six years ago, I was surprised to find that many of those in what are often termed middle class jobs in the UK/US (ie that require tertiary or at least higher level secondary education and educational and/or professional qualifications such as teachers, nurses, doctors, lawyers etc as well as lower to middle managerial appointments) seemed to enjoy a lower standard/quality of life than their UK counterparts.  On discussing the issue with family and friends I found that, while the figure in a persons salary in such occupations in Brazil may be the same as the figure received by his/her counterpart in the UK, the purchasing power of that salary was markedly different.  Even allowing for inflationary pressures, taxation and other factors combine to make goods and services here much more expensive than in the UK or USA.  As an example, a Jeep Grand Cherokee retails at the equivalent of about $89,500 here whereas, in the US, it retails for around $28,000 (taken from Forbes figures).  In the USA, the vehicle costs roughly half the median income, while in Brazil it costs something like 20 times the average wage.  A middle class household, with the salary earner working as a Departmental Head in a bank on around R$70,000 a year will not enjoy the quality of life that his UK counterpart will; particularly when you factor in health insurance for the family, which he/she pays because the national health service here is failing, and add the cost of putting his/her two kids through private school as the public education service is so woeful.  All these factors conspire to erode the quality of life of the middle classes in Brazil.

In light of recent events, however, I think one can say that things may be changing in Brazil, changing amongst its middle classes; both as determined by the SAE and in terms that equate to UK or US meanings of the term.  These population groups may now be reflecting another trait that has commonly been associated with the middles classes of Europe and North America, political engagement and activism.  The 'economic miracle' of the first decade if this century enabled President Lula´s Government to raise tens of millions out of poverty and lift the perceptions and expectations of both classifications of the middle class....but, now that the economy is close to stagnant and the Chinese hunger for Brazilian goods seems almost satiated, the shine has gone off the economic juggernaut and the middle classes are left with high  taxes, high prices (in absolute terms and as a percentage of income) and a quality of life that falls short of the often government fuelled expectations.  Quality of life issues, corruption and the need for political reform were high on the list of grievances that woke the 'Brazilian giant' and brought both middle classes onto the streets; as well as reaction to policing in some of the key cities such as Rio.  The Government has to address these issues if it is to avoid fresh civil protest and unrest next year, soccer World Cup year and election year.  Whereas last June was spontaneous and bottom up, more extremist groups have recognised the potential of such action and appear poised to exploit it for their own, much more disruptive and potentially violent purposes.

A major element to the drive that a healthy economy requires from its middle class is the belief in and expectation of a better quality life, in return for hard work and prudence.  Those expectations are not being met, in Brazil, and belief in them and those who are meant to deliver them has been severely damaged.  Having created and bolstered a middle class, both versions of a middle class, Government at all levels will have to either address their wants and needs or risk their dissatisfaction and potential civil disobedience.

Thanks for joining me for today's post.  I am most grateful to you and hope you will consider returning tomorrow.

Until then, stay safe.

Dave