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Brazil’s economy: The deterioration

Slow growth, stubborn inflation and mounting deficits

 The Economist, December 5, 2013

A SINGLE economic figure can boost or batter a politician’s standing. That makes it tempting to offer sneak peeks of the most flattering ones, as Brazil’s president, Dilma Rousseff, did recently when she told El País, a Spanish newspaper, that a forthcoming statistical revision would raise economic growth in 2012 from 0.9% to a less weak 1.5%. Nemesis is rarely so swift: on December 3rd the national statistics institute said that it had indeed revised the 2012 figure up, but only to 1%. And it announced that GDP shrank by 0.5% in the third quarter compared with the previous three months.

Market analysts rushed to trim already anaemic forecasts for growth this year and next. The fourth quarter might also see a contraction, said Nomura, an investment bank, which would put Brazil in technical recession. Even if that is avoided, with a year to go the economic verdict on Ms Rousseff’s presidency already looks clear. Growth will have averaged around 2% and inflation 6%. Government finances will have deteriorated sharply. A swollen current-account deficit completes a dispiriting picture.

Ms Rousseff will almost certainly run for a second term at a presidential election next October. The needed adjustments to curb inflation and repair the public finances would hurt growth before they started to help, and so they are being put off. But the longer the government delays, the sharper the eventual correction will have to be—and the greater the risk that its attempt simultaneously to juggle inflation, public spending and the exchange rate will see it drop a ball.

Officials point out, rightly, that most emerging economies have slowed this year, and that Brazil grew at a healthy clip of 1.8% in the second quarter compared with the first. Even so, it is lagging behind others. JPMorgan, another bank, brackets Brazil with India, Indonesia, South Africa and Turkey as a country whose currency is vulnerable when America’s Federal Reserve finally “tapers” (ie, reduces money printing) in the coming months. Brazil’s current-account deficit stands at 3.7% of GDP, up from 2.4% in 2012. In the year to date it has run a trade deficit—its first since 2000—and seen the real, its currency, fall against the dollar by 14%.

Brazil is well-placed to withstand currency turmoil: international reserves stand at $375 billion and foreign direct investment remains strong. A weaker real would help reduce the current-account deficit, but it would feed inflation. Despite the weak economy, at 5.8% this is above the Central Bank’s target of 4.5% even though the government has tried to keep prices down by subsidising electricity and public transport, and by forcing Petrobras, Brazil’s state-controlled oil firm, to hold down the price of petrol. On November 30th the government allowed Petrobras to raise the petrol price, but only by 4%, a decision which knocked 9% off the company’s share price (though it later recovered a bit).

The stubbornness of inflation, combined with relatively loose fiscal policy, has forced the Central Bank to tighten monetary policy fast: having slashed its policy interest rate to a record low of 7.25% last year, it has raised it six times in seven months, to 10%. That is another blow for Ms Rousseff, who trumpeted single-figure rates as one of her government’s main achievements.

Disappearing growth, and several failed attempts to kick-start the economy with tax cuts, have hit government revenues. The result is that the primary fiscal surplus (ie, before debt payments) is dwindling. An initial target of 3.1% of GDP has been whittled down by accounting changes (including one that means the federal government no longer has to make up for overspending by states and municipalities). The de facto target of around 1.7% of GDP will not stop net public debt from rising. Even this will be met only with help from one-off items, including payments for oil concessions. Hefty financing costs mean that Brazil is now running an overall budget deficit of 3.5% of GDP.

Rating agencies have said that without a change of course the country risks being downgraded from its current position, a notch above the lowest investment grade. Marcelo Carvalho of BNP Paribas, a French bank, says the government seems to think that it has some breathing space, that a slipping credit rating would not be disastrous as long as it retains investment grade and that sensitive consumer prices can be held down until 2015. Inflation, though high, is not out of control. A long-delayed infrastructure programme is finally under way. Unemployment is close to historic lows. Real incomes are rising, if not as fast as before. And the president’s popularity, hit hard by protests in June, has recovered somewhat, with none of her challengers yet showing any sign of taking off. Ms Rousseff’s team may be right in their political judgment. But they have left themselves little room for manoeuvre.