Brazil Economy: Worst Over?

Is the Brazilian economy past the worst of its recession? Four experts share their predictions.

MORE CREDIT: The recently launched 'My House, My Life' program (Minha Casa, Minha Vida) and the expansion of credit are some of the drivers for Brazilian economic recovery, experts say.

On June 9, Brazil's national statistics agency said the country had officially entered a recession as GDP for the first quarter of 2009 contracted 0.8 percent, following a 3.6 percent decline in the fourth quarter of last year. The first-quarter drop, however, was not as steep as economists had expected. Is Brazil's economy past its worst point? What will drive Brazil's recovery? Which industries will be the first to bounce back?
Paulo Levy, economist at Brazil's Institute of Applied Economic Research (IPEA): The main difference between last year's fourth quarter and this year's first quarter was the behavior of private consumption, which dropped 1.8 percent in the last three months of 2008 and grew 0.7 percent in the first three months of this year. In both quarters, investment plunged, accumulating a 21 percent decline. The impact of the international crisis in Brazil was felt mainly through the trade, credit and confidence channels. In the first case, exports have fallen 20 percent year-to-date through May, but some reaction has already taken place since January, especially regarding commodities exports. The decline in manufactured exports, on the other hand, remains depressed and has had a strong impact on the manufacturing sector, as exemplified by the performance of the auto industry, where, even after the recent recovery, the difference in output levels when compared to last year can be assigned almost entirely to lower exports. The recovery of sales in the domestic market stems from the measures taken to unblock the credit supply. Even though credit concessions remain below their year-ago levels, especially in the corporate sector, in some cases — like consumer loans — it has already increased significantly from the lows seen in the last quarter of 2008. Another factor that might explain consumption's resilience is the so-far relatively mild impact of the crisis in labor markets, with workers' total income still growing close to 6 percent on a year-to-date comparison. Increased government transfers, including the impact of a 12 percent increase in the minimum wage, with strong impact on social security benefits, also played a role in this process of supporting consumption demand. At the same time, confidence is gradually returning in both entrepreneurial and consumer circles. These factors point to a gradual recovery of economic activity in the coming quarters, driven by sustained consumption and, if China returns to its high growth trajectory, also by exports. Given the sharp decline of economic activity in the fourth quarter of 2008, however, it will not be an easy task to avoid negative growth over the year.

Joel Korn, managing partner at Performa Partners in Sao Paulo: Notwithstanding two consecutive quarters of negative economic growth, the performance of Brazil in the period underscores its resilience and strong fundamentals. Unlike in the past, when the country had very high vulnerability to external shocks, Brazil posted a relatively moderate downturn in the past six months, despite the severity of the recession in the United States, other developed countries and worldwide slowdown in the economic activities. The pace of recovery will depend on the intensity of the gradual turnaround of the developed economies, still unclear at this point. Outlook for commodity prices and exports of manufactured and semi-manufactured products is mixed in an environment of slow and uneven growth in foreign markets, with rising unemployment. Nevertheless, largely driven by domestic demand, Brazil is very well positioned to come out of recession and resume moderate economic growth in the second half of this year. Infrastructure projects and construction will help foster economic activities. In addition, industries that benefit from the growing middle class are expected to perform well such as automobile, food processing, personal care, selected retail segments and corporate services. Discipline in current expenditures and sound fiscal stimulus policies are essential components for the sustainability of the economic recovery.

Albert Fishlow, professor emeritus of International and Public Affairs at Columbia University: Brazil was a late entrant into the current world recession, and promises to be an early leaver. Most analysts now believe that the second quarter, almost over, will show some positive growth. Whatever the doubts about the 'green shoots' of global recovery, modestly stimulative monetary and fiscal policy backed by extensive international reserves have enabled Brazil to avoid the larger downturn many had earlier predicted. For the year 2009, the growth rate may be slightly negative because of the speed of the decline in the fourth quarter, but the agenda has now shifted to creating a firm basis for resumption of faster growth. Much lower real interest rates are a positive factor, since reigniting private investment is the heart of the matter. expenditures under Brazil's Growth Acceleration Program (PAC) continue, so public contributions will not fail. Increased exports of manufactured products will help, particularly if economic recovery becomes more generalized. The challenge is not to push excessively, which conflicts with the political reality of a close presidential race in 2010.

Nei Cristofolini, chief representative in the US of Brazilian state-owned bank Caixa Economica Federal: To say for sure that Brazil's economy has past its worst point could be premature, considering that we are talking about a simple comparison between two quarters and a result better (or less bad) than expected. A deeper look at the behavior of the components of GDP like consumer spending, industrial production, investment and so forth, could provide more clues, though not certainties. But it is quite possible that the worst is behind us. What seems to be an important message from this data is that Brazilian resilience to external shocks has improved a lot in recent years. A capitalized financial system, robust domestic demand, reserves and controlled inflation provide support for the measures taken by the Brazilian government to smooth the impact of the world financial crisis and allow an easier recovery. Combining steps in monetary policy and credit, such as the expansion of credit at state-owned banks, reduction of both banking reserves requirements and interest rates, compensatory fiscal measures such as tax exemptions and an increase in public investments have shown to be effective so far. Investments in infrastructure included in the Growth Acceleration Program (PAC), the recently launched 'My House, My Life' program (Minha Casa, Minha Vida, which targets the construction of one million houses) and the expansion of credit including within the private financial sector probably are some of the drivers for Brazilian economic recovery. Therefore, it is reasonable to believe that the industries related to investments in infrastructure and housing sector, including its supply chain, will be among those that will bounce back first.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.