Brazil’s government promised aggressive new stimulus measures after data showed the economy expanded just 2.7 percent in 2011, raising fears that one of the world’s most dynamic emerging markets is slipping into a new era of mediocre growth.
The sharp slowdown during President Dilma Rousseff’s first year in office saw Brazil underperform its peers among big developing countries as local industries struggled with soaring business costs and an overvalued currency. A rebound in consumer spending and strong agricultural exports only barely allowed Brazil to avoid recession during the second half of the year, the data released last week showed.
Investors bet the weak performance would lead Brazil’s central bank to slash interest rates more aggressively, with a cut of at least half a percentage point, and possibly 75 basis points, expected following the bank’s meeting.
Worries about a slowdown in Brazil and China, two of the biggest growth engines in an otherwise troubled world economy in recent years, contributed to the largest declines in global equities in about three months on Tuesday. Brazil’s Bovespa stock index fell 3 percent, while its currency weakened 1.5 percent.
Finance Minister Guido Mantega pointed to data showing a modest recovery in the fourth quarter that he said was likely to accelerate throughout 2012, while vowing that the government would offer tax incentives and other unspecified stimulus measures to spur manufacturing and investment in particular.
“We are better placed to give stimulus this year,” Mantega told reporters in Brasilia. “We will implement all the necessary measures to stimulate the economy.”
Nonetheless, the data reinforced the biggest concern of Rousseff and many business leaders – that Brazil may be downshifting into a prolonged period of lacklustre 3 percent annual growth as a tight labour market, woeful infrastructure and other barriers prevent the economy from expanding any faster.
“Things just aren’t taking off,” said Senator Valdir Raupp, the head of the PMDB party, which is part of Rousseff’s coalition. “Investments aren’t happening. There are just a few sectors where things are going well.”
The slowdown has come as a shock for many Brazilians following 7.5 percent growth in 2010. Even when factoring in the global crisis, growth averaged 4.2 percent from 2005 to 2010.
“If this year continues at the same rhythm as last year, the (economy) could frustrate us again. Starting now, we’re going to have to give it a boost,” Raupp said.
Yet, stimulus could backfire. Inflation reached a seven-year high of 6.5 percent last year, and while it has slowed in recent months, there may not be much room for the government to jolt the economy without risking another bout of price rises.
Economic activity expanded 0.3 percent in the fourth quarter after a revised 0.1 percent contraction in the previous quarter, government statistics agency IBGE said.
The biggest drag on Brazil’s economy continues to be industry, which contracted 0.5 percent in the fourth quarter compared with the previous quarter. Manufacturers have blamed most of their problems on Brazil’s currency, which has strengthened about 40 percent since the depths of the financial crisis in 2009 and 6 percent this year.
“Worse than the gross domestic product (GDP) result is the proof that Brazil is becoming an uncompetitive country,” said Senator José Agripino, from the opposition DEM party.
Rousseff has already implemented targeted tax incentives in recent months to try to help sectors such as autos and consumer goods that have struggled. Her government also has raised the ire of some countries and multinational companies by threatening to raise tariffs on vehicle imports from Mexico, for example.
Mantega said the government was still aiming for 4.5 percent growth this year. However, many business leaders and politicians say that the core problems are more related to high taxes and other costs that will necessitate tough economic reforms to fix – something Rousseff has shown little interest in doing.
“The time has come for us to prioritise courageous structural reforms that really address the competitive problems of the Brazilian economy,” said Paulo Godoy, president of ABDIB, a prominent industry group. “The country needs urgently to reduce the existing barriers to investment.”
Despite the disappointing result of 2011, the residual glow of recent years means that Brazil still feels in many places like a country enjoying an economic boom.
However, that boom is arguably responsible for the problems occurring now. The tight labour market has driven up costs and made it difficult for businesses to see through expansion plans. One high-profile example is the delayed construction of Brazil’s stadiums to host the 2014 World Cup.
Brazil may not be able to depend on its usual partners to spur its economy. A less bullish economic outlook for China and the continued threat of a crisis in the euro zone mean that it may have to continue to rely on its own consumers for growth. – Reuters