Don't Count Brazil out Just Yet

Date: March 12, 2014

Don't Count Brazil out Just Yet

To paraphrase the iconic 19th century American author Mark Twain, reports of Brazil’s demise appear to have been greatly exaggerated. Better than expected results now being reported for the fourth quarter of 2013 paint a somewhat more encouraging picture than the dour landscape many skeptics had expected.

Fourth Quarter growth for 2013 actually turned out to be more than double (0.7%) the expected rate, while a 6.3% jump in investment was also a surprise to the upside, providing further  encouragement that confidence in Brazil is returning.

It still seems odd however to speak of a Brazilian “bounce back”. For the first decade of the 21st Century, Brazil was a “star performer” of the emerging market set, the “B” in the all-consuming BRICS appellation, and a darling for investors around the region and the world.

 The country’s steep decade-long ascent pulled an estimated 40 million Brazilian out of poverty, while the country averaged growth rates in the four-to-five percent range, peaking at over seven percent in 2010. At the same time, unemployment levels were low, and wages were rising, helping to stoke consumer confidence, and allowing domestic consumption to become a major driver of the economy.

The wheels finally began to wobble in 2011 though, as inflation helped to cool the Brazilian zeal to consume and sapped the competitiveness of the manufacturing sector. Limited gains in productivity during the high growth years also served to undermine competitiveness, as did the cumulative effect of years of over consumption and under investment. 

Strains in Brazil’s creaky and inadequate infrastructure became even more pronounced and increasing levels of consumer debt put a further damper on the domestic consumption binge.  Apprehensions were further fueled by clumsy and heavy-handed government interventions into the economy, which took a toll on business confidence, and made many companies investment-shy.

As economic conditions worsened, Brazilian citizens increasingly began to question the wisdom of their government spending billions of dollars on the upcoming World Cup. In popular perception, it appeared that the government was squandering billions of dollars to throw a party largely for the benefit and enjoyment of wealthy foreign visitors, while average Brazilians were forced to cope with dwindling economic prospects and fare increases on heavily utilized public transportation systems.  Frustration reached the boiling point in June, as large scale and sometimes violent street protests expressed the public’s discontent in no uncertain terms. The civil unrest, unfortunately, did nothing to restore consumer or investor confidence.

External factors had also begun to conspire against Brazil. One of the primary drivers of growth had been the world-wide boom in commodity prices, stoked by China’s seemingly insatiable demand for raw materials. With China now entering a new and more moderate-growth chapter in its economic evolution, double digit GDP increases are a thing of the past, and the global commodity super-cycle spawned largely by China’s high-octane growth is drawing to a close. 

Cooling Chinese demand and lower prices for Brazilian commodity exports, especially of soy and iron ore, have hit local producers and exporters hard. With such a crucial external engine of growth starting to slow, and domestic consumers and business seeing less reason to spend or invest, a sharp drop in Brazil’s vaunted growth was virtually assured. Many started to wonder if the decade-long party in Brazil was finally over. Some analysts went so far as to predict an extended slump or period of stagnation for the Latin American giant. 

While it would be a mistake to make too much out of one quarter of encouraging results, it does seem possible however that the pessimism on Brazil was overdone. Although it is unlikely that Brazil will return anytime soon to the “star performer” status it achieved during the most heady days of the BRICS mania, the country does in fact continue to boast a number of assets its neighbors would envy:  A large and growing middle class, low unemployment, and rising wages – to say nothing of the fact that Brazil continues by a fair margin to be the largest economy in Latin America. The faster than expected growth rates at the end of last year suggest that perhaps these assets are once again beginning to reassert themselves.

So, is it party time in Brazil again? That would probably be too optimistic. But one thing is clear:  Don’t count Brazil out just yet.

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