The Economist
Sep 2nd 2015
IN THE past few years Brazil’s economy has disappointed. It grew by 2.2% a year, on average, during President Dilma Rousseff’s first term in office in 2011-14, a slower rate of growth than in most of its neighbours, let alone in places like China or India.
Last year GDP barely grew at all. It contracted by 1.6% in the first quarter, compared to the same period last year, and is expected to shrink by as much as 2% in 2015. Household consumption registered the first drop, year-on-year, since Ms Rousseff’s left-wing Workers’ Party (PT) came to power in 2003.
At the same time, public spending has surged. In 2014, as Ms Rousseff sought re-election, the budget deficit doubled to 6.75% of GDP. For the first time since 1997 the government failed to set aside any money to pay back creditors. Its planned primary surplus, which excludes interest owed on debt, of 1.8% of GDP ended up being a 0.6% deficit.
Brazil’s gross government debt of 62% may look piffling compared to Greece’s 175% or Japan’s 227%. But Brazil’s high interest rates of around 13% make borrowing costlier to service. Last year debt payments ate up more than 6% of output. To let businesses and consumers borrow at less exorbitant rates, public banks have increasingly filled the gap, offering cheap, subsidised loans. These went from 40% of all lending in 2010 to 55% last year.
As the government loosened fiscal policy, the Central Bank prematurely slashed its benchmark interest rate in 2011-12. This pushed up inflation, which is now above the bank’s self-imposed upper limit of 6.5%, and way above its 4.5% target. The interest-rate cut has since been reversed.
On June 3rd the Bank’s monetary policy-makers raised the rate once more, boosting it to 13.75%, more than a percentage point higher than before the decision to cut. Alongside the lack of macroeconomic rigour, there was a lot of microeconomic meddling: the government pursued a clumsy industrial policy and shortchanged the private sector, for example by insisting on absurdly low rates of return on concessions to run infrastructure projects. Small wonder confidence slumped among businessmen.
Red tape, poor infrastructure and a strong currency have rendered much of industry uncompetitive. So consumers have been the main source of demand. A low unemployment rate pushed up wages. In the past ten years wages in the private sector have grown faster than GDP (public-sector workers have done even better). That allowed consumers to borrow more, which encouraged still more spending. Now the virtuous circle is turning vicious.
Real wages have been falling since March, compared to a year earlier, mainly because Brazilian workers’ productivity never justified the earlier rises. People are returning to seek work just as there are fewer jobs to go around: unemployment, which has long been falling and dipped below 5% for most of 2014, increased to 6.4% in April. Economists expect it to reach 8% this year.
To improve its finances the government is cutting spending on unemployment insurance (which had risen even when the jobless rate was falling) and on other benefits. Taxes, including fuel duty, are going up. So, too, are bills for water and electricity (two-thirds of which is generated by hydropower).
The point is to reduce demand following a record drought in 2014 and to correct a policy of holding down regulated prices to keep inflation in check (and voters happy). Because of these increases, inflation soared to 8.2% in the year to April.
All this is hurting disposable incomes, a big portion of which are spent paying back consumer loans taken out in the good times. Consumer confidence has fallen to its lowest level since Fundação Getulio Vargas, a business school, began tracking it in 2005.
The government has no money to boost investment. Petrobras, the state-controlled oil giant and Brazil’s biggest investor, is in the midst of a corruption scandal that has paralysed spending: the forgone investment may reduce GDP growth this year by one percentage point. It is hard to see where growth will come from.
Worst of all, Ms Rousseff’s policy levers are jammed. She cannot loosen fiscal policy without precipitating a downgrade of Brazil’s credit rating. In fact, her hawkish finance minister, Joaquim Levy, has slashed 70 billion reais off the discretionary spending planned for this year (on top of the modest welfare reforms). Nor can the Central Bank ease monetary policy. That would once again undermine its credibility—and weaken the currency.
A depreciating real, which is oscillating around a 10-year low, pushes up inflation; it also makes Brazil’s $230 billion dollar-denominated debt dearer by the day. Ms Rousseff cannot bring Brazil’s animal spirits back to life with more spending and lower interest rates. She can only hope that her return to economic orthodoxy will do the trick.
She has made a surprisingly decent start. But it may take a while.
fonte: The Economist
