By Carlos Pallordet.
As Brazil’s glow fades, the government has made the recovery of economic growth its top priority. Amid a backdrop of global uncertainty and growth deceleration, Brazilian policymakers continue to implement stimulus measures, confident that a temporary boost to aggregate demand will convince the private sector to step in and give momentum to economic activity. A weaker local currency and lower interest rates complete the picture, which authorities expect will produce a sustained recovery of the faltering economy (Chart 1). However, we believe that the growth drivers that were present during the past decade are exhausted, which will prevent Brazil from repeating the growth performance it recorded during that period. Even if the government were to address the structural barriers to investment that are hindering expansion, it would take time for the economy to enter a new path of higher, sustainable economic growth.
Chart 1: Growth is decelerating despite monetary stimulus
In a meeting with businessmen last week in Sao Paulo, finance minister Guido Mantega pointed to booming sales in home appliances and vehicles to demonstrate that the measures aimed at stimulating consumption were proving effective. While blaming the eurozone crisis and the global slowdown for the weak performance of the local economy, he said, “It is a fantasy to say that stimulus measures to spur consumption have exhausted their capacity.”
We believe the government’s focus on consumption-boosting measures is likely to prove unsuccessful as there are increasing sign of consumer fatigue. First, given the credit boom in recent years, consumers are now having to meet higher debt service obligations and are reluctant to step up borrowing (Chart 2). Household credit growth decelerated in May to an annual 13.9%, the lowest rate since 2004. Second, stimulus measures, such as tax exemptions on home appliances and vehicles, have brought forward big-ticket purchases that will result in a moderation of consumption growth in the coming months. Finally, with unemployment already close to a record low and with the minimum wage poised for a smaller hike next year, the scope for consumption growth has narrowed.
Indeed, further stimulus to consumption could work against the recovery of the manufacturing industry rather than helping it. In recent years, increased consumer spending has contributed to the expansion of the services sector, overheating the labour market and driving wage pressures. Although the government has tried to protect the domestic market from external competition, consumers’ higher purchasing power has favoured a rise in imports rather than stimulating local production. This has left the manufacturing industry with higher industrial wages without experiencing much benefit from the increases in consumer spending.
Of late, the government has been keen to emphasise that its strategy to recover growth does not rely solely on stimulating consumption. Mantega recently highlighted the fall in domestic interest rates and the depreciation of the local currency as factors that should stimulate investment. However, surveys on the business environment in Brazil, such as the World Bank’s Doing Business Report, suggest that barriers to investments are not related to a lack of funding or its cost. Rather, they relate to the oft-debated structural competitiveness problems that make up the Custo Brasil: a complex tax system, government bureaucracy, regulatory uncertainty and deficient infrastructure. The government should listen to the many voices that are calling on it to design a new growth agenda instead of continuing on a dead end path.