Brazil reaches limits of growth

What explains Brazil's biggest nationwide street protests in 20 years? After a spectacular decade of growth, based on buoyant demand for its commodity exports and "steroid-like injections of consumer credit", 30 million people have been lifted out of poverty, says the FT.

They are "developing an entirely new relationship with the government", says The Economist. Rather than "being grateful for the occasional crumb thrown from rich Brazilians' tables, they are waking up to the fact that they pay taxes and deserve something in return". Taxes at "rich-world rates" worth 35% of GDP have so far yielded only third-world public services. So it's easy to see why the plan to spend three times what South Africa did on football World Cup stadiums for next year has provoked such ire. The cost of living and corruption are further irritants.

The "diffuse set of grievances" is "in tune with a perhaps more worrying investor zeitgeist", says the FT: "one which suggests that the Brazilian model may have reached its limit". In the last two years, growth has slowed sharply. GDP is expanding at an annual pace of 1.9%, a far cry from the 4%-5% range typical of the past decade. And the near future is unlikely to be much better. The commodity boom is over now that growth in China, and many other emerging markets, has cooled. With private-sector debt having doubled in eight years, consumers look stretched.

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A sliding currency is bolstering already-sticky inflation, so there is very little scope for interest-rate cuts. Brazil urgently needs to boost productivity, infrastructure and investment. But red tape and recurrent government micromanagement it required electricity firms to cut tariffs and forced down petrol prices has unnerved companies. The upshot is that the economy looks stuck in what Tony Volpon at Nomura politely calls a "low-growth equilibrium".

Still, at some point, all the bad news will be in the price. And with Brazilian stocks down almost 40% in three years and on a cyclically-adjusted price/earnings ratio of 11, a discount to most other South American markets, that point may not be too far off. It's certainly too soon to sound the all-clear on emerging markets, but courageous investors could start researching the likes of the JPMorgan Brazil Investment Trust (LSE: JPB) or the iShares MSCI Brazil ETF (LSE: IDBZ).