Brazil is trying to restart its economic growth spurt

SAO PAULO, Brazil — The Brazilian government is hoping to get South America’s largest economy kicking again.

It has yanked down interest rates to record lows and kept the value of the real, the Brazilian currency, in check. The government has even doled out tax cuts in attempts to boost growth.

But so far, there’s not much evidence those strategies are working — and key economic data released Friday probably won’t change things.


The government reported the economy grew less than 1% for 2012, which was slightly below what economists expected. That expansion in gross domestic product was well below the 4.5% the country had been recently averaging, presenting a challenge for a government that needs growth to continue its social progress.

“We’re suffering from a hangover from growing too fast, and the slowdown in 2011 and 2012 has been worse than we expected,” said Caio Megale, an economist at the Brazilian bank Itau Unibanco. “We’re waiting to get back on track in 2013 and 2014, but still, because of structural limitations we think that for the time being we’ll grow slower than we did from 2005 to 2010.”

Brazilians are living better than ever, enjoying record-low unemployment and still-rising wages. But more social gains depend on how — and whether — the country rebounds, economists say.

In Latin America, countries such as Mexico and Colombia are sucking in some of the investment that used to come to Brazil when it was still an investors’ darling. After overtaking the UK as the world’s sixth-largest economy last year, Brazil slid back into seventh place, ahead of France.

Investors have been startled by stubborn inflation, low productivity and onerous taxes that have reappeared as the country attempts to get back on track. Stocks have slid, and the Brazilian government hasn’t done much to make it easy for foreign investors.

“Investing in Brazil is less of a no-brainer now,” Megale said. “You have to know what stock or asset you’re investing in. It’s not just that you bring your money in and automatically make more money, like it was before.”

For much of the 21st century so far, two factors propelled the previously long-suffering Brazilian economy forward.

First, Asian demand for commodities such as iron ore and soy pushed up prices, and money poured into Brazil. From 2000 to 2011, Brazilian exports to China increased more than fortyfold.

Second, governments put the country’s previously crisis-ridden financial system on track, enabling Brazilians to go on a credit-fueled spending spree, often for basic (and Asian-made) consumer items such as refrigerators, cars and washing machines.

The resulting boom, combined with moderate social programs put in place by the government of Luiz Inacio “Lula” da Silva, has lifted almost 40 million Brazilians out of poverty and reduced the often shocking inequality among the country’s residents. Investors got some nice returns, and Brazil emerged on the world stage — winning the rights to host the 2014 World Cup and 2016 Olympics in Rio de Janeiro.

But a recent slowdown in China, not to mention the European economic crisis, has taken its toll. Banks say Brazilian consumers are reaching the limit of debt they can take on.

After the economy averaged 4% to 5% GDP growth per year in 2005-10, growth dropped to 2.7% in 2011, and in 2012 it is expected to have been less than 1%.

“We think the growth from 2005 to 2010 was an exceptional period, owing to factors that won’t be repeated,” said Tony Volpon, an economist with Nomura in New York. He expects Brazil to grow 3.5% this year. “The government is waiting for the measures taken in 2012 to sooner or later cause growth, but those measures may have simply failed.”

From 2011 to 2012, Brazil’s central bank brought interest rates down to 7.25% from as high as 12.5% — around where they had long hovered as some of the highest in the world. The government also granted ad hoc tax breaks to stimulate industry and continued intervening in the foreign exchange markets.

The much-feared threat of inflation has also reared its head again. Inflation may be approaching the official upper limit of 6.5%.

That’s still much lower than problematic levels in neighboring Argentina, but Brazil is especially averse to price rises after going through years of hyperinflation. Some parts of the market want the central bank to change course and raise rates again.

“Growth will stay slow unless there are structural changes, and that really means reform. There is some low-hanging fruit for easy changes, such as with the tax code, which is very silly in places,” Volpon said. “But unlike in Mexico, there is no political consensus here for reform at the moment.”

This may be because in the streets of Brazil, normal people are feeling great, and the government is confident. While investors have taken a hit, high wages and low unemployment have gone hand in hand with approval ratings for President Dilma Rousseff as high as 78%. With most people happy, there is little incentive to make changes.

But all will not stay rosy if growth doesn’t return, Volpon and Megale said.

Many Brazilian industries are in dire need of skilled laborers, having already snapped up everyone available. Economists believe a scarcity of productive workers is one of a few obstacles to getting the country back on track, along with huge infrastructure bottlenecks long in need of investment.

“If we can’t get investment up to 25% of our GDP, we’ll never be able to grow at the rates we had going recently,” said Paulo Sandroni, professor of economics at the Fundacao Getulio Vargas, an elite business school. Poor infrastructure could also be a headache during the World Cup and Olympics.

The worst-hit part of the economy, however, has been industrial production, undercut by competition from China, high costs, and an overvalued real.

“So far a consumer boom has counteracted drops in manufacturing output,” Sandroni said. “But the weakening of the dollar really hurt us.”

After the real climbed against the dollar, making Brazilian exports less competitive, Brazil Finance Minister Guido Mantega in 2010 blamed loose monetary policy in the United States, then put in place a shifting regime of capital controls that made it harder to invest in the country.

The real eventually came down, but as with low interest rates and the fiscal stimulus, the expected benefits have not yet materialized.