Lack of confidence dogs Brazil economy

On the face of it, Thursday brought some sorely-needed good news for Brazil.

The country’s national office of statistics, the IBGE, confirmed the country’s economy had bounced back, if only modestly, with better-than-expected results for the last quarter of 2013 and the year overall, achieving annual GDP growth of 2.3% – more than the US, the UK and other advanced economies.

Brazil Finance Minister Guido Mantega. Photo: Marcello Casal Jr/Agência Brasil

Brazil’s Finance Minister Guido Mantega said the figures were a ‘surprise’ for the government. Photo: Marcello Casal Jr/Agência Brasil

After negative growth in the third quarter of 2013, some economists feared Brazil could be facing a technical recession.

In the end the fourth quarter rebounded with 0.7% growth, buoyed by strong consumer spending, investment and 2.0% growth in the country’s services industry, upon which 70% of the economy relies.

The surprise uptick in the economy is a much-needed boost for the government of President Dilma Rousseff, who is seeking re-election in this October’s general elections, and has been suffering from a compounding of anti-government protests, World Cup concerns, political scandals, and more recently problems with water and power supplies – all of which have seen approval ratings for both Ms Rousseff and her government slide.

Finance Minister Guido Mantega told reporters the positive fourth quarter results had come as a surprise, saying 2013 had seen “quality growth spurred among other things by investments”.

It was certainly better than in 2012, when Brazil grew just 1%; however, the general feeling among analysts surveyed by Anadolu Agency appears to be that the results are mildly encouraging at best, and indeed, nobody is expecting growth to return to the impressive 7.5% seen in 2010 or even to the 4% average seen over much of the last decade, when the economy was boosted by China’s seemingly unstoppable demand for Brazilian commodities.

Over the past decade, Brazil has used available cheap and plentiful external finance options to catalyse a consumption boom, which led to the ‘feel-good factor’ experienced particularly by new middle-class Brazilians in recent years.

But it also led to significant consumer debt and over-target inflation. Now China is no longer buying such vast quantities of commodities, and the global economy is still struggling to recover.

Growth grounded?

Mr Mantega said industry in Brazil was suffering from a “lack of dynamism in the global market”, but was upbeat about the future, defending Brazil as now being in better shape to tackle international instability.

However, once touted as a star among emerging markets, today Brazil’s economic prowess is being described more than ever in shades of ‘fragile’ and ‘vulnerable’, and the IMF recently labelled Brazil as one of the most susceptible emerging economies.

In truth, Brazil has always been a vulnerable economy.

Although international instability, currency volatility, and dwindling demand from China certainly play a role, economists say internal problems – substandard infrastructure, rampant consumer debt and dismal confidence in both the country’s market and policymakers’ decisions at the Central Bank – are also hampering growth and believe Brazil now faces a long period of uninspiring annual growth of around 2%.

I’m sceptical about the economy’s future. We have major issues with infrastructure and the labour market and reforms are sorely needed,” Fernando Chague, professor of economics at the University of São Paulo (FEA-USP), told Anadolu Agency.

According to the USP economist, Brazil failed to implement the necessary fiscal changes in the last decade, while the going was good, and grew largely “in spite of the government”.

“There’s no political strength to do so now, and the uncertainty we are facing is not good for the economy,” Professor Chague warns.

Neil Shearing, chief emerging markets economist at London-based macroeconomic research company Capital Economics says Brazil could in theory get back to annual growth of four percent: “First, economic reform would have to take place to rebuild the supply side of the country’s economy, but politically this would be very difficult at the current time.”

Brazil is now entering the home straight to this year’s general elections, with political campaigns set to start in earnest later this year.

“The much more probable scenario is therefore one of continued weak annual growth of around two percent,” says Mr Shearing.

Boosting confidence

But there have been some positive comments emerging from the situation, and a few economists praised the results and the country’s 6.3-percent increase in investment last year.

That jump in investment should go some way to convincing wary investors that improvements to the economy are occurring and that the government is likely to be more market-friendly should President Rousseff win a second term in office.

Regaining sagging market confidence at home and overseas is also going to be key to getting Brazil back to more impressive results, but investment is still below the level that many investors would like to see and pessimism is said to reign among business leaders – who bemoan the incumbent government’s monetary policy as having been too overbearing.

Businesses also want Brazil to tackle the toxic mixture of suffocating bureaucracy, a poorly educated labour force and infrastructure that is not fit for purpose – all of which increases the price of doing business in Brazil, often referred to as the “Brazil cost”.

Professor Chague cites the example of Brazil’s ports which, despite investment, still experience major backlogs in getting goods in and out of the country.

Investments have been promised in the government’s official acceleration plans (PAC) and in some cases made – but progress is slow and many projects have hit obstacles.

Tough year to come

The overseas market has also not been enamoured by Brazil’s national debts, even though the government has promised to cut US$18.5 billion in public spending this year to show it is tackling the issue.

With extra investments promised for infrastructure, the World Cup and the Olympics to pay for, and more money pledged for cash-strapped public services in response to protesters, few people are expecting Brazil to spend less this year, and ratings agencies have hinted they might put Brazil on a negative outlook if signs of economic improvement fail to appear.

Most market analysts put GDP growth forecasts for 2014 at 1.7 percent and the government’s official prediction has recently been slashed from 3.8 to 2.5 percent.

Despite this Mr Mantega says he believes the Brazilian economy to be “on a trajectory of gradual acceleration [that] will continue in 2014” and described 2013 as a “difficult year”.

But the government is in a Catch 22 situation: they must spend more to appease social unrest and prove they are investing more and improving infrastructure, but also simultaneously cut spending to allay market concerns and bolster confidence.

Several additional issues – including a severe drought in parts of the country affecting harvests, economic chaos in neighbouring Argentina and Venezuela, as well as ongoing protests and the make-or-break of this year’s World Cup – could also collude to stymie economic activity further and make 2014 yet another difficult year.

Extended version of article for Anadolu Agency

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