Just when it seemed the Brazilian economy was impervious to a year of non-stop stimulus policies, the recovery finally looks to be under way – this time, for real.
Optimistic Brazilian policy makers have been forced to repeatedly slash their growth expectations over the last year and a half after spikes in economic activity turned out to be short-lived.
Now, members of President Dilma Rousseff’s economic team tell Reuters they are confident the economy grew more than 5 per cent in annualized terms in the third quarter, after a barrage of tax and interest rate cuts sparked a surge in sales of everything from cars to freezers. In the second quarter, the economy had expanded at an annualized pace of only 1.6 per cent.
“The recovery is here, there is no doubt about that,” said one official, who asked for anonymity.
Still, Brazil is not completely out of the woods. A fragile global economy, plus severe infrastructure bottlenecks, sluggish investment and continued uneven performance by manufacturers at home are the main obstacles ahead.
In 2012 the economy is likely to expand only 1.5 per cent even with the improvement in the final months, but officials expect growth of about 4 per cent in annualized terms in the fourth quarter and 4 per cent growth throughout 2013.
Independent economists also see a solid rebound ahead in Latin America’s biggest economy, according to a Reuters poll of 36 banks earlier this month. The median forecast for growth in 2013 was 4 per cent and French bank BNP Paribas was even more optimistic, forecasting a 5.5 per cent expansion.
Investors and officials had become anxious after a year of aggressive fiscal and monetary stimuli failed to revive an economy that nearly stagnated after growing a staggering 7.5 per cent only two years ago.
Driving the recovery were auto sales that surged by 15.3 per cent in August to hit record highs while retail sales remained surprisingly robust for the third straight month.
Foreign investment in factories is rebounding and for the first time in over a year the manufacturing industry added most of the new jobs to the economy in September, in signs that the worst may be over for an industrial sector that has been the main drag on the economy.
A pickup in consumption helped Brazil’s biggest retailer, Grupo Pao de Acucar, post stronger gross sales and higher net revenue in the third quarter. Brazilian plane maker Embraer SA has said government tax incentives helped improve its profitability in that quarter.
Meanwhile, Ms. Rousseff and her aides are working hard to keep confidence levels high – and thus shield the recovery.
The trained economist herself announced to a crowd of auto executives on Wednesday what is expected to be the last extension of the temporary tax cut for car makers. The tax break reduces the price for consumers by about 7 per cent – an incentive credited with the recent recovery in the industry.
Finance Minister Guido Mantega did his share this week by saying the government will keep the local currency stable at any cost, which would help ease costs for a local industry struggling with a flood of imports.
The government is planning to announce as soon as next week a new round of concession bids for public airports and ports. Officials are also working on ways to simplify and lower a series of federal and state taxes in coming months.
“The message (to business leaders) is obvious. Invest more and invest more now,” said another economic official.
Some analysts worry the rebound is too reliant on short-term stimulus measures by the government, meaning the path to a full-fledged recovery remains on shaky ground.
As the first official said: “The recovery is not going to be as spectacular as some originally thought.”
After an impressive surge in August, car sales faded a bit in September as the effect of the tax cuts started to ease.
The once-booming construction sector is also struggling to recover even amid heavy government spending on public housing and building for the 2014 World Cup soccer tournament and the 2016 Olympics. The country’s second largest home builder, Cyrela Brazil Realty SA, cut its sales outlook twice this year on a weak economy and mounting costs.
Low investment is also a chronic problem as a mix of high taxes, expensive labour force, red tape and dilapidated infrastructure make Brazil one of the most difficult and expensive countries in the world to conduct business.
That cocktail, known here as “Brazil cost,” is seen limiting economic growth to between 3 and 4 per cent in the medium term – below the 5-per-cent-plus pace often seen in the last decade.
A blackout in Brazil’s northeast late on Thursday, which left as many as 53 million people without power, was the latest reminder of the supply-side problems that may limit growth going forward.
But government officials say the main worry remains the health of the global economy as rich nations like the United States and Europe face years of below-trend growth.
“A slowing global economy could certainly hurt our recovery,” said another official. “But we are confident our domestic market is strong enough to get us out of this mess.”