Brazil Economy Crashing Down?

Brazilian President Dilma Rousseff with Finance Minister Guido Mantega. (Photo: Seplan)

The Economist's cover in 2009 (left) and a recent illustration (right).

Is Brazil's economy taking off or crashing down? Four experts weigh in.


Inter-American Dialogue 


Consumer confidence in Brazil increased 1 percent over the past month according to an index that the Getulio Vargas Foundation released Sept. 24. The increase followed a 4.4 gain the previous month and propelled the index to its highest level since February. Meantime, Brazil's National Confederation of Industries said Sept. 25 that the country's economy should grow 2.5 percent this year, as compared to 0.9 percent last year. What is driving Brazil's economy and boosting consumer confidence? Are President Dilma Rousseff's efforts to spur the economy working? What could derail Brazil's economic performance? 

Thomas Rideg, managing director of Global Intelligence Alliance: 
Consumer confidence growth is a very good sign for Brazil. The country has overcome international economic and financial turbulence over the last few years very much as a result of its strong internal market, which is fuelled by consumer confidence. A strong internal market makes an economy less vulnerable to international speculation and decreased investment because it keeps on pumping internally; in fact, it reverses the trend. Brazilians in general are optimistic and have the tendency to purchase beyond their means. With growing access to credit (despite high interest rates), and an impressive official unemployment rate of 5 percent, Brazilians have more access to goods and more visibility to the outside world, as well as higher demand and expectations. The National Confederation of Industries' growth projection indeed shows a positive curve from 2012, but this still can be considered very disappointing for a country that has been one of the world's growth highlights and is also preparing to host the World Cup and Olympics. I would not credit increased consumer confidence to politics in Brazil's current environment. Regulations are complex and unpredictable. For example, a recent proposition came out this week to increase the property tax by 20 to 30 percent in São Paulo. Such unfriendly moves are precisely the things that can derail economic performance as they directly affect both consumer and investor confidence. Some international media have been trying to portray an image of future decline for many emerging markets. Let's not be fooled. Brazil is a country of 200 million people, with 26 states and a good spread of agricultural, industrial and service sectors. It also has an abundance of natural resources, a proven and increasingly sophisticated private sector as well as a growing pool of talent exposed to esteemed international and local educational institutions. It is inevitable that Brazil will continue to have an ever-increasing role in the world's economy. 

Barbara Kotschwar, research fellow at the Peterson Institute for International Economics: "That Brazil is getting its inflation under control and seeing better growth than last year is good news, particularly as emerging markets confront less-favorable external economic conditions. I would, however, approach this news with guarded optimism. Consumer confidence is at its highest this year, but it is still lower than it was at this time last year. Inflation has dropped below the inflation target's upper bound, which is good for confidence, but this is in part due to temporary measures. Whether this is sustainable, particularly heading into an election year, is worth watching. Before asking The Economist to again revise its iconic Brazil graphic (which recently saw the Christ the Redeemer statue in a downward spiral), Brazil will have to tackle some obstacles that continue to bedevil growth prospects. These include a cumbersome tax rate, famously weak infrastructure, corruption and continuing discontent with the quality of public goods. To its credit, the Rousseff administration has undertaken major infrastructure investments and has indicated willingness to address the issues frustrating the middle class. Investor interest has been weak, however, and progress slow. With the economic tailwinds of the 2000s abating, Brazil will have to draw on its strengths--a highly productive agricultural sector and strong innovative sectors such as biotech--for productivity gains and make adjustments to policies that prevent it from capitalizing on those strengths. Allowing Mercosur member countries to negotiate bilaterally with the European Union, their major trading partner, would be one place to start. 

Carolina Costa Hurtado, director at McLarty Associates in Washington: "Long renowned for its striking inequality, the center of a coveted olive-shaped Brazilian society is finally beginning to take shape with more than 50 percent of the country today considered middle class. The foundation of this economic growth was built by the sound economic and social policy reforms of the past 15 years, the enduring global demand for Brazilian commodities, the existence of sophisticated professional and financial services sectors, and stable public institutions. The gravitational force of these macro factors has pulled millions of Brazilians out of destitute poverty into lives of upward mobility, a trend that will itself further contribute to growth as a vast domestic consumer market emerges. A challenge has been to transform the recent boom into consistently improved living conditions and public services for everyday citizens. The June protests were notable in that they showcased the political force of an emerging middle class in Brazil that is now empowered to demand a quality of living commensurate with its place in society. The protests caught the Rousseff administration by surprise and heralded a note of caution that the fruits of Brazil's boom can prove fleeting if the economy falters under external pressures and the need for structural reforms. Inflationary pressures are real, with the often-mentioned 'Brazil Cost' at least partly responsible for the now-infamous $700 smart phones and $50 pizzas, along with a rising consumer price index. So, while a boost in consumer confidence would contribute to growth, there will be some constraints to Brazil's growth model. However, internal investments in infrastructure and health care should intensify, and as long as Brazil is able to maintain its resilience to external shocks and its trade partners don't suffer a complete meltdown, the Brazilian economy should continue to grow at a modest rate over the next few years. 

David Ross, managing director at Chevy Chase Trust Investment Advisors in Bethesda, Md.: Brazil's economic performance appears to have gained some momentum over the last two quarters, with record strength in the labor market providing support for the economy. With increased consumer lending from a banking sector working with a more profitable yield curve due to hikes in the Selic rate, consumer confidence and spending have remained strong. The recent currency decline has provided a short-term boost to exporters. Encouragingly, growth in investment has picked up this year. Investment rates in Brazil, especially when compared to the more dynamic regional economies, have been too low. However, it is unlikely that the recent improvement in economic growth is sustainable. Further gains from labor market improvement are unlikely as unemployment is already at record low levels. Inflation remains at levels the central bank finds uncomfortable, and inflation will likely worsen as we approach next year's election with additional social spending and a ramp up in World Cup and Olympics spending. Interest rates will continue to rise in response to inflation pressures, which will reduce consumption demand. Combined with the hikes we have seen so far, it will slow the economy's progress later this year and into 2014. The bottom line is that, for the time being, Brazil appears unable to break out of its pattern of stagflation. Unfortunately, the last decade's commodity boom allowed Brazil to avoid the hard choices that it now needs to make in order to become more competitive globally and usher in a new period of sustained economic growth.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

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