Lack of confidence dogs Brazil economy

By Ben Tavener

SAO PAULO - On the face of it, Thursday brought some sorely-needed good news for Brazil: the country`s national office of statistics, the IBGE, confirmed the country`s economy had bounced back - if only modestly - with better-than-expected results for the last quarter of 2013 and the year overall, achieving annual GDP growth of 2.3 percent – more than the U.S., the UK and other advanced economies.

After negative growth in the third quarter of 2013, some economists feared Brazil could be facing a technical recession. In the end, the fourth quarter rebounded with 0.7 percent growth, buoyed by strong consumer spending, investment and two-percent growth in the country`s services industry, upon which 70 percent of the economy relies.

The surprise uptick in the economy is a much-needed boost for the government of President Dilma Rousseff, who is seeking re-election in this October`s general elections and has been suffering from a compounding of anti-government protests, World Cup concerns, political scandals, and problems with water and power supplies – all of which have seen approval ratings for both Rousseff and her government slide.

Finance Minister Guido Mantega told reporters the positive fourth quarter results had come as a surprise, saying 2013 had seen “quality growth spurred among other things by investments."

It was certainly better than in 2012, when Brazil grew just 1 percent; however, the general feeling among analysts spoken to by Anadolu Agency appears to be that the results are mildly encouraging at best.

Indeed, nobody expects growth to return to the impressive 7.5 percent seen in 2010 or even to the 4 percent average seen over much of the last decade, when China`s seemingly unstoppable demand for Brazilian commodities boosted the economy.

Over the past decade, Brazil has used available cheap and plentiful external finance options to catalyze a consumption boom, which led to the `feel-good factor` experienced particularly by new middle-class Brazilians in recent years.

But it also led to significant consumer debt and over-target inflation. Now China is no longer buying such vast quantities of commodities, and the global economy is still struggling to recover.

- Growth grounded?

Minister Mantega said industry in Brazil was suffering from a “lack of dynamism in the global market,” but was upbeat about the future and defended Brazil as currently being in better shape to tackle international instability.

However, once touted as a star among emerging markets, today Brazil`s economic prowess is described in shades of `fragile` and `vulnerable` and the IMF recently labelled Brazil as one of the most susceptible emerging economies.

Although international instability, currency volatility, and dwindling demand from China certainly play a role, economists say internal problems – substandard infrastructure, rampant consumer debt and dismal market confidence – are also hampering growth. They believe Brazil now faces a long period of uninspiring annual growth of around two percent.

"I`m sceptical about the economy`s future. We have major issues with infrastructure and the labour market and reforms are sorely needed,” Fernando Chague, professor of economics at the University of Sao Paulo (FEA-USP), told Anadolu Agency.

According to the USP economist, Brazil failed to implement the necessary fiscal changes in the last decade, while the going was good, and grew largely “in spite of the government."

"There`s no political strength to do so now, and the uncertainty we are facing is not good for the economy,” Chague warns.

Neil Shearing, chief emerging markets economist at London-based macroeconomic research company Capital Economics, says Brazil could in theory return to annual growth of four percent: “First, economic reform would have to take place to rebuild the supply side of the country`s economy.”

However, given that the country is now entering the home straight to this year`s general elections, many believe major policy reform would be too painful politically at the current time.

"The much more probable scenario is therefore one of continued weak annual growth of around two percent,” says Shearing.

- Boosting confidence

But some positive comments have been emerging from the situation, and a few economists praised the results and the country`s 6.3 percent increase in investment last year.

That jump in investment should go some way in convincing wary investors that improvements to the economy are occurring and that the government is likely to be more market-friendly should President Rousseff win a second term.

Regaining sagging market confidence at home and overseas is also going to be key to getting Brazil back to more impressive results, but investment is still below the level that many investors would like to see and pessimism is said to reign among business leaders – who bemoan the incumbent government`s monetary policy as having been too overbearing.

Businesses also want Brazil to tackle the toxic mixture of suffocating bureaucracy, a poorly educated labour force and infrastructure that is not fit for purpose – all of which increases the price of doing business in Brazil, often referred to as the “Brazil cost.”

Professor Chague cites the example of Brazil`s ports which, despite investment, still experience major backlogs in getting goods in and out of the country.

Investments have been promised, and made in some cases, in the government`s official acceleration plans - but progress is slow and many projects have hit obstacles.

- Tough year to come

The overseas market has also not been enamoured by Brazil`s national debts, even though the government has promised to cut US$18.5 billion in public spending this year to show it is tackling the issue.

With extra investments promised for infrastructure, the World Cup and the Olympics to pay for, and more money pledged for cash-strapped public services in response to protesters, few people are expecting Brazil to spend less this year, and ratings agencies have hinted they might put Brazil on a negative outlook if signs of economic improvement fail to appear.

Most market analysts put GDP growth forecasts for 2014 at 1.7 percent and the government`s official prediction has recently been slashed from 3.8 to 2.5 percent.

Despite this Mantega says he believes the Brazilian economy to be “on a trajectory of gradual acceleration [that] will continue in 2014” and described 2013 as a “difficult year”.

But the government is in a Catch 22 situation: they must spend more to appease social unrest and prove they are investing more and improving infrastructure, while also simultaneously cutting spending to allay market concerns and to bolster confidence.

Several additional issues - including a severe drought in parts of the country affecting harvests, economic chaos in neighboring Argentina and Venezuela, as well as ongoing protests and the make-or-break of this year`s World Cup - could also collude to stymie economic activity further and make 2014 yet another difficult year.

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