FOR Brazilians, disappointing economic news just keeps coming. After weak third-quarter GDP figures shocked market economists and government at the end of November, both cut their predictions for growth in 2012 to just 1%. Then the government admitted it would only hit its closely watched target for the primary fiscal surplus—of 3.1% of GDP—by omitting some infrastructure spending from the sums, bringing forward dividends from state-owned firms and raiding the sovereign wealth-fund it set up in 2008. Now inflation figures have brought more gloom. During 2012 prices rose by 5.84%—above market expectations, and, for the third year running, close to the ceiling of the range (2.5-6.5%) targeted by the Central Bank.

In fact, the headline figure underestimates inflationary pressures. If the federal government had not capped petrol prices, and municipalities frozen public-transport fares before October’s local elections, last year’s figure would have been closer to 6.5%. In 2013 both those prices are likely to rise. The end of a sales-tax holiday for cars will boost inflation, too. Most analysts now think that inflation will be around 6% this year. Week by week, they are revising down their forecasts for economic growth in 2013, now at about 3%.
The government’s response to the bad news stoked fears that Brazil may be in for a long spell of high inflation and low growth. Stung by criticism, Dilma Rousseff, the president, pointed out that Brazil is still growing faster than Europe. That is true, but hardly a very illustrious comparison: most other emerging economies, including in Latin America, are doing far better.
The fudging of the fiscal target disappointed, but did not surprise. In 2010 it was only met by a complicated bond swap between the treasury and Petrobras, the state-controlled oil company, which magically added 0.9% of GDP to the surplus. Brazil could probably run a lower primary surplus without risking its hard-won reputation for fiscal sobriety. But changing the target would be a better way to do so than resorting to creative accounting.
More worrying are plans to weaken the Fiscal Responsibility Law of 2000, which completed the job of cleaning up the mess left behind by decades of high inflation. If Congress agrees, as seems likely, the federal government will be able to cut taxes without having to say, as now, how it will make up the revenue shortfall.
This suggests that with a presidential election due in 2014, officials will do whatever it takes to meet their forecast of 4% growth this year. Further stimulus may come partly in the form of yet more giveaway credits from state banks. But policy is already very loose. The Central Bank’s benchmark interest rate is less than 1.5% in real terms. Any further stimulus is more likely to push up inflation than growth, thinks Carlos Langoni, a former Central Bank governor. “The problem is structural: lack of competitiveness,” he says.
The government has tried to tackle that, but with piecemeal measures. It is cutting payroll taxes. But despite slower growth, unemployment in the six biggest cities is just 4.9%. Employers have hung on to excess workers, partly because firing them is expensive. The tight jobs market has meant that the tax cuts have fed through into higher wages, rather than lower costs for businesses, says Ilan Goldfajn of Itaú BBA, an investment bank. Without faster growth, such hoarding of labour cannot last indefinitely.
The most likely source of business optimism is a successful round of infrastructure auctions, planned for later this year. That would show that the government is serious about tackling bottlenecks—and not too wedded to its statist ways to offer investors an attractive rate of return.
Even so, 2013 looks like uphill going. A further complication is that a drought last year is threatening electricity generation at Brazil’s big hydropower plants. Gas- and oil-fired plants, normally switched on only in the dry season, are running at full tilt. The last time reservoirs fell this low, in 2000, electricity rationing ensued.
Rain might yet come to the rescue. But if it doesn’t? The government is pushing ahead with big cuts in electricity tariffs, promised last year even as the reservoirs were receding. Lower energy prices are a big part of its plans to improve industrial competitiveness, and are politically popular. But ploughing on may be costly too. Gas is much pricier than hydropower (partly because the government has discouraged the private sector from looking for it). If it cuts tariffs, the government will have to pay the difference. And by stimulating demand, cheaper electricity will bring the risk of rationing a bit closer. Ms Rousseff is not an overtly religious person. But she may be praying for rain.