May 29, 2013, 4:26 PM ET
Brazil’s Growth Disappoints, but Commodities Aren’t the Whole Story
By Charles Roth
Like other big commodities producers in Latin America, Brazil’s economy grew less than expected in the first quarter, hit by falling commodities prices amid lackluster global growth. But unlike most of its neighbors in the region, Brazil’s economy is proving far less resilient to the downturn in commodities.
Why? Just a week ago, Brazilian Finance Minister Guido Mantega said the government’s “anti-cyclical” spending boosts investment and stimulates growth.
He suggested Latin America’s biggest economy would expand around 3.5% this year, recovering from a 0.9% expansion last year. On Wednesday, though, he conceded that Brasilia will now have to revise downward that forecast.
Brazil’s economy grew just 1.9% in the first quarter from the year before, less than the consensus forecast of about 2.4%. It rose a meager 0.6% seasonally adjusted from the fourth quarter.
Mr. Mantega looked on the bright side. “Finally, investment is reacting to the stimulus that the government has been providing in recent years,” he said. Investment rose 4.6% in January through March from the previous quarter.
No doubt encouraging, but at 18.4% of gross domestic product, “Brazil (still) has one of the lowest investment ratios of all the major economies in Latin America, which in part explains Brazil’s low potential GDP,” Goldman Sachs says in a note. Driving investment was an increase in inventories, which Goldman expects to “ease from the unexpectedly strong” build in the first quarter.
Brazil badly needs investment to ease supply constraints, drive growth and temper inflation, which is running around an annual 6.5%, the high end of the central bank’s tolerance range. But domestic savings, at just over 14% of GDP, is too low to finance much of it, putting pressure on Brazil’s current account, which about doubled in the first quarter from the year before and is running around 3% of GDP. The current account gap is now bigger than foreign direct investment inflows.
While net government debt isn’t high at third of GDP, Brasilia can’t ramp it up for spending if it’s to meet its primary surplus target of 3.1% of GDP this year, without resorting to creative accounting. Nor is there room for monetary stimulus, given the high inflation rate. In fact, the central bank is expected raise its key rate late Wednesday a quarter point to 7.75%.
If fiscal and monetary policy are constrained, there are also few other domestic drivers of growth ahead.
A bumper harvest helped in the first quarter, but won’t as much in the second as it winds down.
Brazilian consumers have sustained the economy amid carnage in Brazil’s industrial sector, which contracted 0.3% in the first quarter from the previous three months–even with tax breaks. But Capital Economics notes household balance sheets are about tapped out after a long-running credit spree, so banks have been getting stingy with loans.
The external sector was no help, with imports rose 6.3% in the quarter from the one before, while exports shrank 6.4%. And the outlook is hardly encouraging: China, Brazil’s most important export market, is seeing its growth forecasts trimmed, with the latest cut coming from the International Monetary Fund. The commodities downturn also won’t help Brazil’s terms of trade.
As Mr. Mantega suggested, Brazil’s first-quarter data are prompting a revision in growth expectations. Nomura said it now sees 2013 growth at 2.5%, rather than its previous view of 3.4%. Barclays also cut its outlook to 2.5%, from 3%, while Capital Economics doesn’t expect growth of more than 2.8%.
“That would be a poor return on the authorities’ large stimulus in recent years, and would
leave Brazil trailing in the wake of Mexico and the Andean nations of Chile, Colombia and Peru,” Capital Economics adds.
Chile and Peru have already reported first quarter annual growth of 4.1% and 4.8%, and are expected to grow this year close to 5% and 6%, respectively. Mexico grew 0.8% last quarter, and is likely to grow around 3% this year.
Why are they so much better? High and complicated taxes and a mountain of red tape weigh Brazil’s economy down. Brazilians on average will have to work 150 days this year to pay all their taxes, more than the 91 days in Mexico, or 92 days in Chile. Brazil’s tax take, at around 40% of GDP, is one of the world’s highest.
And the tax system is convoluted: Each of Brazil’s 27 states has its own tax regime with different brackets for different lists of products, making interstate commerce complex and expensive. A long-running reform of it remains elusive.
At 130, Brazil also ranks low in the World Bank’s “Ease of Doing Business Survey”- right near Cambodia and Tanzania.
Rather than fiscal stimulus, Brazil might take a page out of Mexico’s playbook, and pursue structural reforms. It might also be more market friendly, like Chile and Peru, which rank 37 and 43, in the World Bank’s business conditions survey.
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Why? Just a week ago, Brazilian Finance Minister Guido Mantega said the government’s “anti-cyclical” spending boosts investment and stimulates growth.
He suggested Latin America’s biggest economy would expand around 3.5% this year, recovering from a 0.9% expansion last year. On Wednesday, though, he conceded that Brasilia will now have to revise downward that forecast.
Brazil’s economy grew just 1.9% in the first quarter from the year before, less than the consensus forecast of about 2.4%. It rose a meager 0.6% seasonally adjusted from the fourth quarter.
Mr. Mantega looked on the bright side. “Finally, investment is reacting to the stimulus that the government has been providing in recent years,” he said. Investment rose 4.6% in January through March from the previous quarter.
No doubt encouraging, but at 18.4% of gross domestic product, “Brazil (still) has one of the lowest investment ratios of all the major economies in Latin America, which in part explains Brazil’s low potential GDP,” Goldman Sachs says in a note. Driving investment was an increase in inventories, which Goldman expects to “ease from the unexpectedly strong” build in the first quarter.
Brazil badly needs investment to ease supply constraints, drive growth and temper inflation, which is running around an annual 6.5%, the high end of the central bank’s tolerance range. But domestic savings, at just over 14% of GDP, is too low to finance much of it, putting pressure on Brazil’s current account, which about doubled in the first quarter from the year before and is running around 3% of GDP. The current account gap is now bigger than foreign direct investment inflows.
While net government debt isn’t high at third of GDP, Brasilia can’t ramp it up for spending if it’s to meet its primary surplus target of 3.1% of GDP this year, without resorting to creative accounting. Nor is there room for monetary stimulus, given the high inflation rate. In fact, the central bank is expected raise its key rate late Wednesday a quarter point to 7.75%.
If fiscal and monetary policy are constrained, there are also few other domestic drivers of growth ahead.
A bumper harvest helped in the first quarter, but won’t as much in the second as it winds down.
Brazilian consumers have sustained the economy amid carnage in Brazil’s industrial sector, which contracted 0.3% in the first quarter from the previous three months–even with tax breaks. But Capital Economics notes household balance sheets are about tapped out after a long-running credit spree, so banks have been getting stingy with loans.
The external sector was no help, with imports rose 6.3% in the quarter from the one before, while exports shrank 6.4%. And the outlook is hardly encouraging: China, Brazil’s most important export market, is seeing its growth forecasts trimmed, with the latest cut coming from the International Monetary Fund. The commodities downturn also won’t help Brazil’s terms of trade.
As Mr. Mantega suggested, Brazil’s first-quarter data are prompting a revision in growth expectations. Nomura said it now sees 2013 growth at 2.5%, rather than its previous view of 3.4%. Barclays also cut its outlook to 2.5%, from 3%, while Capital Economics doesn’t expect growth of more than 2.8%.
“That would be a poor return on the authorities’ large stimulus in recent years, and would
leave Brazil trailing in the wake of Mexico and the Andean nations of Chile, Colombia and Peru,” Capital Economics adds.
Chile and Peru have already reported first quarter annual growth of 4.1% and 4.8%, and are expected to grow this year close to 5% and 6%, respectively. Mexico grew 0.8% last quarter, and is likely to grow around 3% this year.
Why are they so much better? High and complicated taxes and a mountain of red tape weigh Brazil’s economy down. Brazilians on average will have to work 150 days this year to pay all their taxes, more than the 91 days in Mexico, or 92 days in Chile. Brazil’s tax take, at around 40% of GDP, is one of the world’s highest.
And the tax system is convoluted: Each of Brazil’s 27 states has its own tax regime with different brackets for different lists of products, making interstate commerce complex and expensive. A long-running reform of it remains elusive.
At 130, Brazil also ranks low in the World Bank’s “Ease of Doing Business Survey”- right near Cambodia and Tanzania.
Rather than fiscal stimulus, Brazil might take a page out of Mexico’s playbook, and pursue structural reforms. It might also be more market friendly, like Chile and Peru, which rank 37 and 43, in the World Bank’s business conditions survey.
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