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Consumption-led growth reaches its limits in Brazil

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Traffic is backed up during rush hour on the Avenida 23 de Maio highway in Sao, Paulo, Brazil. Photo: Bloomberg.

For many Brazilian executives, it was a day from hell. Last Friday, Brazil’s statistics agency published data showing the economy grew just 0.2 percent from January to March, marking a third consecutive quarter of stagnation – a shock for a country that only recently was booming.

Later in the day, São Paulo was brought to its knees by what city authorities described as its worst-ever traffic jam, with more than 295km of clogged roadways snaking through Brazil’s business capital and some furious commuters needing more than four hours to get home.

The symbolism was inescapable: Brazil has done a superb job of building and selling cars in recent years, but failed to build enough roads to accommodate them. Similarly, the economy as a whole has depended too much on stoking consumer demand and not enough on increasing supply by way of investment, resulting in terrible bottlenecks that have left Brazil at a standstill.

Some of Brazil’s top business leaders, speaking at a Reuters Latin America Investment Summit, said the demand-led model had probably run its course. They said that for Brazil to break out of its current logjam of annual growth rates below 3 percent, President Dilma Rousseff’s government would have to take bolder – and more difficult – steps to improve infrastructure and create a better investment climate.

“The simple stuff has already been done,” said Frederico Curado, the chief executive of Embraer, the largest maker of regional jets.

“Credit is not going to stimulate the economy the way it did in recent years. There’s no way.

“Consumption alone is not going to get it done. There has to be investment,” Curado reasoned.

Here again, the example of cars is instructive. A boom in consumer credit, and the entry of 30 million Brazilians into the middle class over the past decade, has caused vehicle sales to nearly double in the past five years. In São Paulo alone, more than 900 new vehicles were hitting the streets every day.

Yet, so far this year, car and light truck sales are down 4.4 percent compared with the year before. That’s despite positive tailwinds such as record-low unemployment, high consumer confidence, and several stimulus programmes passed by Rousseff’s government aimed at stimulating vehicle purchases.

The sales slowdown suggests, then, that many Brazilians either cannot afford to take out more loans, or that for logistical reasons, including worsening traffic in several big cities, acquiring a new car just does not make sense.

Executives in other industries cite the same pattern.

“All the factors are there… (but) the extremely positive factors are not being reflected in consumption,” Hugo Bethlem, the senior vice-president for corporate relations for Grupo Pão de Açúcar, Brazil’s biggest retailer, said at the summit.

He, too, suggested that Brazilian consumers have simply pushed themselves – and the economy – as far as they can.

“Are we going to reach a balance between internal savings and consumption? And could that be the factor that’s draining resources a bit today? Did people decide to get their lives back in order (by paying debts) so they can get back to consuming?”

A growing body of evidence suggests the answer to all of those questions is “yes”.

Debts mount

Looking at the economy more broadly, consumer default rates rose in April to their highest level since November 2009, which was the middle of the global crisis. O Estado de S Paulo newspaper said last Sunday that household debts now equalled 42 percent of disposable income, up from about 20 percent in 2005.

Executives at the summit said there was no reason to panic – they did not see a credit bubble waiting to pop – but they agreed something else must take credit’s place to drive the economy.

“The growth trend for credit has slowed down. It’s absolutely natural, normal and healthy,” said Henrique Meirelles, Brazil’s central bank president from 2003 to 2010 and now chairman of the holding company that controls JBS, the world’s biggest beef producer.

Meirelles said Brazil had already squeezed the benefits out of what he called a “perverse demographic bonus” – millions of young Brazilians finding work in an expanding economy where unemployment has fallen to 6 percent from 13 percent in 2003.

“The next challenge now is productivity,” Meirelles said. “Some say Brazil will never (tackle) that, (but) I think it will. It’s not something that takes place overnight.”

Yet the pendulum is swinging in the wrong direction. The data showed spending on capital goods – a measure of investment in technology and equipment to boost productivity – fell 1.8 percent in the first quarter compared with the previous quarter. Brazil’s investment rate, now at 18.7 percent of gross domestic product (GDP), is the lowest in the Brics group of emerging markets that includes Russia, India, China and South Africa.

Many economists said the bearish investment trend, more than any other single factor, caused them to slash their growth forecasts after the data were released. The median forecast in a weekly central bank poll released last week saw just 2.72 percent GDP growth for 2012, down from 2.99 percent last week.

If the new consensus forecast is correct, that would mean a repeat performance of Brazil’s disappointing 2.7 percent growth last year – a far cry from the torrid 7.5 percent expansion in 2010 that made Brazil a favourite among investors.

Senior officials in Rousseff’s government, also speaking at the summit, acknowledged the slowdown was sharper than expected but said they were taking necessary steps.

Finance Minister Guido Mantega said struggling industries were Brazil’s biggest problem, and blamed that sector’s troubles mostly on risk aversion caused by the euro zone crisis.

He expressed confidence that a wave of recent tax incentives, including for the automotive industry, and recent declines in both Brazil’s currency and its interest rates would be enough to stimulate consumption and investment.

“Brazil will go back to having greater investment rates,” Mantega said. “It’s a country that’s profitable, solid, stable, and it will attract investment because, starting shortly, when that momentary flight to safety (of foreign capital) stops, then investors will look at opportunities again.”

Inflation rises

Yet, even if the crisis in Europe is “momentary” – which many doubt – the executives at the summit said bigger changes were probably necessary to get Brazil back to its glory days.

Persistent inflationary pressure resulting from the severe infrastructure bottlenecks would limit the central bank’s scope for further rate cuts, they said. And speakers generally downplayed the effect of the currency’s 16 percent depreciation against the dollar since March, saying it was helpful but not a game changer.

That is partly because exports play a surprisingly small role in Brazil’s economy. Despite its global reputation as a commodities giant, trade actually accounts for just a quarter of GDP, making Brazil the most closed major economy in the western hemisphere, according to the International Monetary Fund.

Consequently, the boost to growth must probably come from within. The idea most frequently cited by executives at the summit was a sweeping reform of Brazil’s tax system – which is classified by the World Bank as by far the world’s most complex – which would then open up new funds for investment.

But members of Rousseff’s economic team have said such a broad tax reform is not politically viable – a reality that executives with connections in Brasilia are fully aware of.

“It’s a complex process, it’s been attempted for years,” said Almir Barbassa, the chief financial officer for Petrobras, Brazil’s state-run oil giant. “It seems that those that could benefit don’t really believe in the idea, while those who would be damaged end up against it, so it’s really difficult to push forward.”

In the absence of ambitious changes, few executives seemed to expect much improvement in the economy going forward.

Roberto Setubal, the chief executive of Itau Unibanco Holding, Brazil’s largest private-sector bank, said Brazil had “the conditions to grow 4 percent a year” but also acknowledged the country was “not as attractive as in other moments”.

Gustavo Franco, a former central bank chief who is now the chief executive for Rio Bravo Investimentos, an asset management firm, also cited 4 percent growth as a possible new ceiling.

“This perhaps is the limit,” he said. “There is a feeling that the model of growth is not exhausted, but tired.” – Reuters


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