Research Dept. News
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Monthly Report, num 350 - October 2011
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International review - Brazil
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Brazil: growth, industry and corruption in the hot seat
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Brazil's economy grows by 3.1% in the second quarter, notably moderating its rate of progress.
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In line with consensus expectations, Brazil's GDP grew by 3.1% year-on-year in the second quarter of 2011, 0.8% compared with the previous quarter, suggesting a gradual slowdown in the second Latin American economy. A breakdown by component verifies the following: the notable resistance of household consumption, boosted by an unemployment rate at a record low; investment's gradual loss of steam; and the stagnation in foreign demand, although exports withstood the strong real surprisingly well over the period in question. With regard to public expenditure, its growth was similar to that of the first quarter.
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Brazil's central bank surprises by lowering interest rates, although inflation has yet to let up.
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With a view to the second half of the year, macroeconomic indicators and the slowdown in the recovery of advanced economies point to few changes in the pace of activity for Brazil's economy compared with that observed in the last quarter, perhaps improving slightly by the end of the year, when the latest stimulus measures start to have an effect. Given this scenario, we have revised downwards our growth forecast for 2011, from 4.2% to 3.9%, and also for 2012, from 3.8% to 3.6%.
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This palpable tone of moderation in growth prompted Brazil's central bank to lower the SELIC rate by 50 basis points after its meeting in August and not to rule out further decreases before the end of the year. This decision surprised many analysts as inflation has yet to let up and is still moving away from the target set by the Monetary Policy Committee (4.5% ±2). In August, it reached 7.2% and, contrary to expectations, the preliminary figures for September point to greater increases. With a view to the remainder of 2011, base effects should play in its favour but the marked depreciation of the real in the last month, to levels not seen since mid-2010, might compromise the necessary price correction.
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Nonetheless, this appreciation is still good news for the export industry, particularly for manufacturers. A sector that was also thankful for the Brazilian government's recent decision to substantially raise the duty on imports of automobiles with low local content (except for those from Mercosur countries or Mexico), which would particularly affect vehicles from China and Korea.
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Risk aversion achieves what the Brazilian authorities did not: slowing up the real.
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This measure, clearly protectionist in nature, not only goes against the price moderation but might also lead to formal WTO disputes between the Brazilian authorities and those of countries affected by the duty. Should this happen, Dilma Rousseff's government would open up another front line, this time on the international scene, added to the battlefront already set up within its own borders. In the last few months, the Brazilian president has embarked on a tough fight against corruption that has already led to the resignation of four ministers and the exit from the coalition government of the Republic Party, an ally of Lula and Rousseff's Workers' Party since 2003. Although public opinion supports Rousseff's tough approach in combating corruption, the PR's exit from the coalition may hinder the president's ability to keep a firm hand on the Brazilian economy's helm; a firmness that's essential given the uncertain seas at a world level.
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