Managing the Downswing in Brazil / by Mark Langevin

Since Brazil’s amazing comeback in 2010, two years after the 2008 Wall Street meltdown, the country’s growth has cooled off to an average of 2.8% and probably will not surpass 1.5% in 2012.  Brazil’s National Confederation of Industry (CNI) quarterly economic indicator report, CNI Informe Conjuntural Jul-set 2012, paints a sober scenario about present and future growth, and argues that much more investment is needed to retain growth levels of 4-5% a year.


CNI expects that the industrial sector will contract by 1.9% in 2012, despite its recent rise in activity during August and September and likely strong finish for the calendar year.  The service sector continues to grow, holding up the economic ship behind annual growth of 8.8%-stemming from mounting consumer demand backed up by the expansionary policies of Brazil’s federal government and Central Bank.  However, investment remains locked down to approximately 18.7% of the Gross Domestic Product (GDP), and the country is now in the fourth consecutive quarter of falling investment levels.


Exports have also evaporated as China curbs its appetite for Brazilian iron ore, Europe chooses to fast its way to fiscal stability and recovery, and Argentina carefully weeds out Brazilian exports to save its precariously positioned industrial sector.  Making things worse, prices have generally fallen for Brazilian exports, driving down investment in those key export sectors of the economy, including the aviation company Embraer. The bright side is the continued United States demand for Brazilian products, growing 11.7% in the first eight months of 2012.


How is Brazil managing the global downswing that has placed a damper on its industrial development and aggregate growth?


First, the Brazilian Central Bank has engaged in monetary defense to modestly depreciate the national currency, the Real, so that Brazilian exports retain some sense of competitiveness in relation to the strategic downsizing of Chinese and U.S. currencies.


Second, the Federal Government has been spending more than its revenues, reflecting its classic counter-cyclical fiscal policy orientation. While revenues drop down from their 8% growth rate a year ago, down to under 4% in the last several months, government spending has continued to grow at a rate of 11.6% in the first seven months of 2012.  Government spending has played a key role in keeping the national economy growing.


Third, Brazilian consumers continue to spend with record low unemployment and a steady increase in real earnings.  Just imagine if the economy picks up again!


Fourth, Brazil’s Central Bank has also driven down interest rates with successive cuts to the prime “Selic” rate, but credit access is still tight for consumers and firms in the face of the global downtown. However, if the Central Bank sticks to its expansionary monetary policy, then eventually more will borrow at historically low rates and this could keep the economy growing in the short to medium terms.


Certainly Brazilian policy makers are frustrated at the global downturn and the austerity policies being implemented in Europe and the U.S. (mostly at the stat and local levels). Yet, they are employing trusted expansionary policies to weather the downturn and place the country’s workforce and firms in a more competitive position upon a global recovery.  Policymakers continue to show competency in the art of economic stability coupled with expansionary policies; no easy trick.  However, the CNI may be right to point out that future growth may depend upon rising investment in competitive industries and agribusiness; and possibly a transition from heightened consumer spending to increased savings rates among a population increasingly optimistic about employment and earnings.