Brazil: is the carnival over?

Not long ago, Brazil was an emerging-market favourite. But last year, its Bovespa index was one of the world’s worst performers. Economic growth, which surged by 7.5% in 2010, is expected to reach just 1.5% for 2012. And this isn’t simply a cyclical dip. Many analysts now reckon that the economy’s natural speed limit – the pace it can grow at without inflation taking off – has fallen to 3.5%, notes Bob Davis in The Wall Street Journal.

The problem is that “the motors of growth… in the past decade are sputtering”, says The Economist. One motor was rising commodity prices and, hence, exports. China’s slowdown and weak recovery, along with a softer global economy, has clouded the outlook.

Meanwhile, Brazil’s consumption boom has faltered. Private-sector credit has almost doubled to 48% of GDP in eight years. By the end of 2011, debt-servicing costs accounted for up to 20% of households’ disposable income. With banks cautious and consumers stretched, there is scant scope for another boom.

All this means that growth will now have to come from higher productivity and investment, says The Economist, and that’s where the problems start. Brazil’s investment rate is an abnormally low 19% of GDP, compared to the 25% typical for emerging markets. That creates various bottlenecks that crimp growth.

For instance, Brazil has fewer paved roads than Mexico, despite being four times bigger, notes Capital Economics. So shipping goods around is awkward and pricey. Power and telecoms infrastructure is also deficient.

Meanwhile, widespread red tape also adds to the so-called ‘Brazil cost’ of doing business, and companies have been deterred from upping investment by the government’s micromanaging. It has tried, for instance, to influence the price the state-owned energy group Petrobras charges for petrol.

Fixing the supply side of the economy will take time, says Capital Economics. Meanwhile, the bottlenecks mean that there is limited scope for the central bank to lower interest rates to temper a global downturn. Or to put it another way, “odds are that inflationary pressure will rise strongly as soon as growth accelerates”, says Arthur Budaghyan of BCA Research. Brazil’s carnival looks over, and the next one may not start for some time.


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