Brazil's Long Term Growth Prospects Are Shaky

After last year's 0.2% contraction, in the first quarter of 2010 Brazil's economy expanded 9% stimulated by renewed global demand for exports, expansion of credit and government incentives. Yet, the rapid pace of expansion may also lead to overheating of the economy, which can result in significant rise in consumer prices and endanger the long term development prospect

Indeed, there are clear signs that growth in demand exceeds that in supply and the country is expanding above potential growth rate which may lead to pick up in inflationary pressure. For example, since December industrial production has been rising at the average rate of 18%, in March it reached 20% and in April 17.4%. Also, in May, inflation went up 5.22% from a year earlier, the fifth consecutive month above the 4.5% central bank target.  Looking further, because of fears of attracting speculative capital, the Central Bank of Brazil Monetary Policy Committee (COPOM) started rising interest rates only in April. Yet, although in June the cost of borrowing was increased again to 10.25%, it may be too late to save Brazilian economy from overheating and possibly having a hard lending.

To make things even worst, the long term growth prospect may be easily hampered by the huge role of the government on the economy. In fact, government spending accounts for more than 20% of Brazil's GDP. And even though the government workforce was reduced by 150,000 in the 1990s , since then it rose by twice that number. To make things even worst, a lot of last year stimulus money went on employing public sector workers and expanding pension and benefit plans instead of improving the country’s poor infrastructure. And even with rising revenues, the average 8% rise in annual rate of  federal-government spending may not be sustainable in the future without imposing higher taxes and lowering investments.

Anna Fedec,
6/10/2010 5:39:38 PM